The ups and downs of investing
Wednesday 26th October 2022
Katy Baxter
Over recent months and weeks global stock markets have been volatile to say the least and it's been an uncomfortable ride for our investors. The temptation when the world is laden with bad news is to grab the reigns. To take action or do something/anything in order to feel in control. However, investors who try to do this, to 'time the market' over the course of an investment cycle often suffer whiplash. Looking back at financial history helps us understand why timing the market - abandoning the process - is rarely a good idea. The chart opposite shows bull and bear markets going back to the Second World War (using US equity markets where there's lots of data).
Although the world has changed a lot in the last 80 years, the investment cycle has maintained a familiar shape. The heartbeat of market forces looks pretty similar through the decades. Neither good times nor bad times last forever. The good times tend to be better than the bad. Bear markets see average declines of 33%. Bull markets see average gains of 164%. And the good times tend to be longer than the bad. Bear markets last an average of 11 months, while bull markets last an average of nearly five years.
There's also another important statistic hidden away in the data - which explains the whiplash mentioned earlier. On average, half of the total bull market returns occur in the first year following a bear market. That bounce back from recessionary lows to starting a new cycle happens violently and quickly - we saw that most recently during COVID-19. Missing out on that first period of gains is catastrophic for returns.
You've heard me say many occasions that it's time in the market and not timing the market that is so important and these facts are evidence of why I keep saying it. We want to make sure our clients are invested for the ups, which means accepting that you will be invested for the downs. That might be uncomfortable but in the long term it is the right process to follow. If there are any aspects of your own portfolio that you would like to discuss please do not hesitate to get in touch.
The value of your investments can go down as well as up, so you could get back less than you invested.
The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.