Investment Perspectives
“Everything feels unprecedented when you haven’t engaged with history.” – Kelly Hayes
There has been lots of noise over the past week about the stock markets and we want to reassure you that this is a normal part of investing.
It’s essential to remember that markets are cyclical. Periods of growth are inevitably followed by periods of correction. While it's tempting to focus on short-term fluctuations, a long-term perspective is often much more beneficial.
A terrifying tale every time
The thing with market sell-offs is that there’s ALWAYS a different thing to last time, and it’s usually something that you hadn’t even HEARD of a few months before.
But trading the headlines isn’t a sensible way to live your life – high stress, for very little reward. We have often referred to tuning out the noise. You can find out more on that in our previous blog post here.
Check out a meander through history below.
Source: Factset/7IM, Past performance is not a guide to future returns, chart(s)/data for illustration purposes only.
Short-Term Volatility vs. Long-Term Growth
Short-term: The stock market is inherently volatile. Over a month, various factors like economic indicators (US employment data), company earnings, and geopolitical events can significantly impact prices. This leads to fluctuations that can be both rewarding and nerve-wracking.
Long-term: Historically, the stock market has shown a tendency to trend upwards over extended periods. While there are corrections and bear markets along the way, the overall trajectory has been positive. This is largely due to economic growth, corporate profits, and inflation.
The charts below highlights the short and long term performance of the S&P 500.
Source - FE Analytics - S&P 500 1 (July - August 2024) month data
Source - FE Analytics - S&P 500 (1988-2024)
Can you avoid market volatility?
In short, the answer is likely no. It is unlikely that investors can successfully time the market, and if they do manage it, it may be a result of luck rather than skill. Further complicating the prospect of market timing being additive to portfolio performance is the fact that a substantial proportion of the total return of stocks over long periods comes from just a handful of days. Since investors are unlikely to be able to identify in advance which days will have strong returns and which will not, the prudent course is likely to remain invested during periods of volatility rather than jump into and out of stocks.
The chart below helps illustrate this point. It shows the annualised compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.
Source: ‘Recent Market Volatility’ March 2020 - Dimensional Fund Advisors
What can I do?
Key drivers for a better investment experience:
Diversification: Spreading your investments across different asset classes can help mitigate risk. A balanced portfolio, incorporating stocks, bonds, and potentially other assets, can provide some stability during market volatility. (see more below)
Risk Tolerance: Understanding your personal risk tolerance is crucial. Are you comfortable with ups and downs, or do you prefer a more conservative approach? Your investment strategy should align with your financial goals and comfort level.
Long-Term Perspective: While it's easy to get caught up in daily market movements, successful investing often involves a long-term outlook. Focus on your financial goals and maintain a disciplined investment approach.
While challenges exist, there are also opportunities. For example:
Market Corrections: When markets decline, it can be a chance to purchase quality assets at discounted prices.
Proper diversification
Of course, most people (we hope!) aren’t just holding the MSCI World or the S&P500 as illustrated above. The chart to the right, which you may have seen before demonstrates the true randomness of market returns.
As of the end of June 2024, Japanese Equity looked great. And Gilts, Real Estate and Corporate Bonds didn’t.
But as of today, you can flip that on its head. Stick Japan at the bottom.
That’s what proper diversification delivers. The ability to perform without having to “time” markets based on headlines.
Creating your Financial Freedom
The fact is we have no idea where markets are headed or whether there is a greater chance markets will crash or compound at reasonable rates of return over the next few years. No one does.
Investing is hard, but it doesn’t need to be as hard as people make it. Success can come in very different forms, so long as you consistently adhere to your personal plan.
Growth, income generation and capital preservation can all be successful strategies, so long as you are disciplined enough to stick to them. So today, while the market feels a bit frothy, inflation remains stubbornly high, and the risk to the downside feels greater than the potential to the upside, history has shown that trying to constantly adjust your approach to fit the current market environment as opposed to your unique financial plan doesn’t typically work out well.
missed our latest blog posts, catch up here
Sources: 7IM - ‘7@7’, Dimensional Fund Advisors - ‘Recent Market Volatility’, FE Analytics