The coronavirus is still very much with us – as is much of the economic disruption caused by the resulting lockdowns and restrictions being placed on us. Although it is evident that we are quickly closing in on a vaccine, indeed multiple vaccines, this weekend’s announcement of a further month of lockdown is a bitter blow. This week, we will also see the results from the highly polarised presidential election in the United States which looks like it has voting issues brewing that we are not used to seeing.
So before we are further overwhelmed by these issues, I would like to take a moment to review what we should have learned (or re-learned), as investors, since the onset of the Covid-19 crisis and the subsequent stock-market decline that began to unfold in March.
The lessons are:
- There is no amount of study that can ever prepare us for dramatic events like those which we have witnessed over the past few months, and these so-called ‘’Black Swan’’ events always seem to come at us from the deep left field. Therefore, trying to make an investment strategy out of the expert proclamations of market commentators and economic forecasters alike will always set investors up to fail.
The mainstream media have their own agenda and do not know or care about your financial goals. Instead, having a plan that is centred around your most cherished life goals and continually working on your plan – with the inevitability of temporary market declines firmly in mind as well as the fears we suffer when they happen – is what tends to keep us on course, as well as helping to avoid sudden emotional decisions.
- Global stock-markets declined between 30%-40% in the space of a little over a month. None of us have ever experienced the markets decline so quickly before. However, the decline was just about normal in terms of its depth.
The stock market has declined by around a third on average every five years, and by 13.5% on average every year. However, if we look at the FTSE 100 it has gone from 1,000 points at its inception in 1984 to where it is today. Inclusive of reinvested dividends it has returned 1007% over that 36 year period. The S&P 500 index has returned 2220% over the same period.
The lesson from history is that declines don’t last. The peaks and troughs don’t count. The permanent uptrend in the line drawn between the them and the reassertion of progress is all that does.
- Unless you managed to switch off from the headlines you will have noticed the news flows concerning the virus and economy continued to be dire, even when global stock-markets had largely recovered (FTSE 100 aside) by Mid-August. Markets are often described as ‘forward looking’ because stock market valuations often resume their advance before the economic picture clears up. The lesson here is that if we are waiting for a sign that things are improving then history tells us we may have already missed out on a significant part of the recovery and the ongoing advance.
- If you have been investing monthly throughout the decline (which many of you have), the recent decline has been good news for your investments. A monthly investment strategy (‘Pound Cost Averaging’ as you may have heard me say) loves volatility as it allows you to buy more shares at lower prices than you could both before and after a temporary market decline. The only effort required is the discipline of regular investing.
The overriding lesson is that short term market movements cannot be predicted – or timed – and the investor who is truly focused on achieving their financial goals is best advised to just ride out short term market movements. Your investment portfolio has been carefully selected by your adviser to be appropriate for your requirements and it is globally diversified to suit the level of investment risk you are comfortable taking, with the knowledge that these movements will happen.
The key phrase in all of this is of course ‘in the long term’ and that may not be as intuitive a concept as it should be. We cannot help but focus on the current events that dominate the news and our attention but it is in the long run in which we live our lives and in which we truly invest; first in accumulating enough capital and second in withdrawing from it to spend on enjoying a multi-decade retirement and the very cherished dreams you worked and accumulated your savings for, and then ultimately in passing on your legacy.
One last word – we have enough to contend with at the moment with protecting our health and that of our family and loved ones and in dealing with the disruptions we face to our businesses and our lives. So if you would like to talk about these issues or any other at all please do contact me or your adviser at Suttons. That’s our job.
Thank you for being our client. It means the world to us to be your advisers.
Yours sincerely,
Ben Preston APFS, CertPFS (DM), CertCII (MP)
Chartered Financial Planner, Director
