It is now over three weeks since massive sell-offs pushed the world’s stock markets into a bear market. Of course this is an uncomfortable time for investors, but bear markets are a natural part of the market cycle; after a decade of rising markets, it’s easy for investors to forget this.
It’s also easy to lose sight of another fact of investing, which is that every bear market ends and is followed by a bull market. The chart below tracks the UK stock market since 1900. As the chart shows, investors who have stuck out bear markets have been rewarded for their perseverance with bull-market returns that have more than made up for the preceding losses.
FTSE All-Share Index since 1900 Source: Vanguard
At the moment, it can feel challenging to not panic and remain invested, but we remain sure that this is the best course of action.
Here are a few simple reminders to help you through the uncertainty.
Bear markets are common
Bear markets occur frequently. Since 1980, there have now been six bear markets in the United Kingdom.
The key to getting through the turbulence is to understand that market swings are normal and relatively insignificant over the long term.
It’s also helpful to consider the relationship between bear markets and recessions. Whilst it is now quite likely that we will now enter an economic recession, this does not definitely mean that stock market returns will remain negative. In the USA, a bear market has prevailed in only three of the last 14 recessions. Conversely, it’s not uncommon to see lacklustre or even negative market returns in years of solid economic performance.
Tune out the noise
It’s important to recognise that shifting your portfolio in the hope of avoiding a loss or netting a gain rarely works and could hurt long-term performance.
From 2000 to 2019, the USA’s S&P 500 Index had a compound annual return of 6.1%. But if the ten best days during that period were excluded, the index would have had just a 2.4% compound annual return. Excluding the 25 best days, it would have had a –1.0% compound annual return.
Staying invested in the market is vital because the best and worst days tend to cluster together.
Maintain perspective and discipline in the face of adversity
Investing can provoke strong emotions. In the face of market turmoil, some investors may find themselves making impulsive decisions to sell out of the market. Discipline and perspective can help us remain committed to long-term investment programmes through periods of market uncertainty.
Remain patient and remember that Provisio’s diversified portfolios enable you to be well positioned to ride through the lows and highs of the investment.
No one knows what the future holds. But understanding the past can help us avoid impulsive decisions that may cause far more harm than good to a portfolio’s long-term value.
We are sure that things will improve, they always do. Sitting tight has always been the most consistently effective strategy to deal with stressed markets like these
If you want to chat any of this through in more detail then please contact us.