At the start of 2020, many stock markets around the world were trading at near all-time highs and consequently many investment portfolios appeared to be performing well. But in March, the COVID-19 outbreak had a devastating impact on global markets with very few places to hide as equities delivered their worst losses since 2008. In the UK, the FTSE All-Share Index, which is a broader index of companies than the headline-grabbing FTSE 100, had a total return including dividend pay-outs of minus 25.1% during the first quarter to 31 March 2020. In the US, the S&P 500 fell by 14.53% and every major index in the world experienced similar levels of downturn.
As a result of this, we all experienced a double-whammy of fear. There is the fear of contracting coronavirus and the physical harm and risk to life that the pandemic can create, and the market reaction that can result in financial loss and hardship.
However, reaction to the financial markets is something that is within our control. It is absolutely natural to be concerned when markets fall, even temporarily, and this can cause a sense of panic as nobody wants to lose money. This is why some people will try to time the market, although history tells us that is rarely the right action to take.
Timing the markets involves trying to second-guess the ups and downs, with the hope that you will buy when prices are low and sell when they are high. However, it is very difficult to do and getting it wrong can result in locking in losses and making the situation worse.
Not only is timing the market difficult to get right, it also poses the risk of missing the ‘good’ days when share prices increase significantly. Historically, many of the best days for the stock markets have occurred during periods of extreme volatility. Anybody who pulls money out in the early stages of a volatile period could miss these good days, as well as potentially locking in some losses. For example, in April and May 2020, the FTSE All-Share index bounced back +12.72% and the US equity market had its strongest April performance since 1987.
Spending time in the market is more likely to give you good returns over the long term. Investment decisions should be based on the long-term fundamentals, rather than short-term market volatility.
Of course this means experiencing the bad days as well as the good days, but markets and wider economies have a tendency to go up over time. This applies to everything from share prices to the price of goods. Successful investing requires patience and taking a long-term view, and being comfortable riding out the short-term ups and downs for the chance of a much better return over longer periods of time.
One of the reasons that long-term investing has the potential to deliver such great returns is the power of compounding. Einstein allegedly called compounding the eighth wonder of the world, but it essentially means the snowballing effect on your returns generates better results over time.
This can be seen through the reinvestment of dividend payments into more shares – to subsequently receive more dividend payments and buy even more shares.
The power of this historical upwards trend can also be seen if you consider a fictional investor who invested at the worst possible times over the last 30 years and still made a profit, based on the performance of the MSCI World Index (assuming each investment was made on the day of the nearest market peak).
If they had invested £10,000 into the global stock market at the peaks before each of the following events:
Their original £50,000 investment (£10,000 prior to each event) would today be worth £210,896 – growth of just over £160,000!
Of course past performance is not a reliable indicator of future performance, but it demonstrates how strongly markets have risen over the long term, even if you had invested at the worst possible times.
[Source: FE Analytics, measuring the Total Return of the MSCI World Index to 17.06.2020]
At Crowe we believe in the power of investing for the long term and have a consistent investment philosophy and process that feeds into all of our client portfolios.
The key aspects of our investment philosophy include:
To quote the great American investor and business tycoon, Warren Buffet ‘our favourite holding period is forever’.