Keeping market falls in perspective

Keeping market falls in perspective

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As the UK lurches from uncertainty to uncertainty over its intended exit from the European Union, investors are unsurprisingly as uncertain as everyone else as to what the future holds. However, this is nothing new and as you may recall, December 2018 dished up a rather distasteful present for the holiday period. Many lines were written in the broadsheets about the global equity market falls, but were they really anything out of the ordinary?

‘Stock market slide in 2018 leaves investors bruised and wary’

The Financial Times (31st December 2018)

Since 2009 (the bottom of the market during the global credit crisis) global markets have delivered positive returns in eight out of the 10 subsequent calendar years. The last negative year for equities was back in 2011, when the markets were down around 7%. Over the history we have available to us – on average – one in three years delivers negative returns. Investors have, of late, been extremely lucky.

Since 2008, in every single year, investors have suffered a fall from a previous market high and many of these falls were larger than 10%. However, even investing at the start of 2008 and suffering the 35% peak-to-trough fall in that year, an equity investor would have turned £100 into £230, i.e. 8% compounded over 11 years, if they had been both disciplined and patient (admittedly, two known areas of human weakness!).

As humans, we tend to have a strange view of what invested wealth represents and how we feel about it at any point in time. We tend to be happy as it – at least on paper – goes up to some value at a specific point in time but unhappy when we reach that value again if it is achieved after a market correction.

Remember that the true meaning of wealth is having the appropriate level of assets that you require, when you require them, to meet your financial and lifestyle goals. In the interim, any movements in value are noise, just the somewhat meaningless and part and parcel of investing. When you invest in equities, you should try to avoid mentally banking the money that you (appear to) make on the undulating, and sometimes precipitous, road on which you are travelling. Remember too that the headline equity market numbers are unlikely to be your portfolio outcome, as most investors own some sort of a spread between bonds and equities. This tends to reduce the impact of falls but also that of upward movements.

The future is always uncertain

Investing in equities is always going to be a game of two steps forward and one step back. What equities deliver from one year to another is of little consequence to the long-term investor who does not need all of their money back today.

As far as 2019 is concerned, no one who is honest knows what will happen in the markets. The global economy is still set to grow by 3.5% above inflation this year, according to the IMF, which is not that bad. Today’s (and every other day’s) market prices reflect the aggregate view of all investors based on the information to hand. If new information comes out tomorrow, prices will adjust to reflect the impact this has on company valuations. As the release of new information is – by definition – random, so too must price movements be random, at least in the short-term. Over the longer-term they reflect the real growth in earnings that companies deliver through their hard work, executing the delivery of their business strategies. In the longer-term, investing in the stock market is a game worth playing, at least with part of your portfolio.

As Benjamin Graham – a legendary investor in the early 20th Century once said:

In the short run, the market is a voting machine but in the long run it is a weighing machine”

I could not agree more.