Often with articles like this, I include a disclaimer at the bottom that is full of important small print about the potential risks associated with investing that you should read (but may not). For this article however, I’d like to do something different and draw your attention directly to one of its key lines: your investments can fall as well as rise.
This fact is rarely remembered in times of market stress when, with screens flashing red and stock prices tumbling, it’s easy to get caught up in the emotion of the moment. After all, a very real cost is being had on livelihoods and the wider economy. But, as cold as it sounds, this is all to be expected.
Market falls are a fact of investing life and essentially an expensive illustration of the cyclical nature of the global economy. Therefore, it’s important that as an investor, your investment horizon – the amount of time you plan to hold your investments for – matches your risk appetite.
IGNORE SHORT-TERM NOISE
With markets comprised of thousands of listed companies, each influenced by many different internal and external factors, indices move up and down throughout each trading day. However, on average the shorter-term movements are more drastic than the long term.
Looking at the S&P 500 from 1926 to 2015, over a daily timeframe, on average there were positive returns for 54% of the time and negative returns for 46% of the time. Over a 20-year timeframe? 100% and 0% respectively. Over time markets have gradually climbed so it makes sense to pause and look at where things may head in the long run.
If your time horizon is short, you may be forced to sell at a loss, whereas if you have longer to invest you have more time to recoup losses, should they happen. It’s that simple. Anything that promises quick and stellar returns, is probably too good to be true. Long-term investing is all about patience. Dull and boring, but eventually – and hopefully – rewarding.
There’s an extreme example of this from a study Fidelity Investments carried out a few years ago, when it tried to find the best self-directed investors on its books. Of those who had done the best in the long term, most were people who had either forgotten their password or, simply, had died. Their portfolios had not been swayed by short term news stories or ‘the hot new investment ideas’ and were therefore allowed to climb uninterrupted.
I don’t encourage death or forgetting your password as effective strategies for maintaining a long-term investment. And, asset allocations should be checked regularly (you may be able to afford exposure to riskier assets with 30 years’ investing ahead of you, but when you have 5 years left, this level of risk may need revising). Overall a bit of patience and resilience could make a big difference.
KEEP THE FAITH
I appreciate this is easier said than done and even professional investors can find market downturns difficult as we’re all human. However, flawed, impulsive and emotional humans often make the mistake of knee-jerk responses. When markets start to fall – for whatever reason, from Global pandemics such as we are experiencing now to central bank press conferences in Europe – some of us will panic. In the 2008 financial crisis, terrified investors offloaded billions in shares.
At the height of the chaos, this seemed a natural response and there was lasting damage in some sectors, as will undoubtedly be the case post COVID-19. However, following 2008 major stock markets around the world more than recovered and investors who panic-sold have missed out on these gains.
First published in Accountancy Today
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