We know that riding the ups and downs of the market can be uncomfortable. From Brexit to Trump, it’s hard to keep up with changes from one day to the next. So, here are some rules of thumb to help you stay cool through it all.
1. You should expect there to be some ups and downs along the way.
Since 1900 there has been a correction (a fall of 10-20%) once per year on average, and a crash (a fall of >20%) once every four years on average. Despite the frequent corrections and crashes, the stock market (FTSE All-World GBP) delivered an average return of 7.9% per year over the last 20 years. Volatility is the price you pay for higher returns!
In addition, newspapers and headlines are full of stories bracing you for bad weather ahead, that’s how they sell papers. But if you look back at history (see graph below), these headline-grabbing moments don’t look so bad, do they? You wouldn’t want to miss out on those long-term gains because you stepped out at the wrong time.
2. Whilst we know corrections and crashes will happen, predicting when they will happen is impossible.
Many have tried and failed but in the words of Warren Buffett, the world’s most successful investor: “The only value of stock market forecasters is to make fortune tellers look good.”
What’s more, selling up and being out of the market can end up costing you. Say you invested in the stock market (FTSE All-World GBP) from 2008 through to 2017 and never sold a share, you’d have made an average return of 8.8% per year.
However, if you tried to ‘time the market’ you might have missed the 10 best trading days during that same period, and your average return would have fallen to 3.85%. If you had missed the top 30 trading days your return would have collapsed to -2.11%! The lesson here is to stick with your plan, even when your instincts are telling you to get out quick.
3. It’s tempting, but dangerous to link political and economic events with stock market performance.
In the last 20 years, we’ve experienced a Global Financial Crisis, and significant political upheaval in Europe and the US. Despite this, during this time, the stock market (FTSE All-World GBP) delivered an average return of 7.9% per year. The world continued to progress, and companies continued to grow their profits, in spite of the many challenges!
4. Setbacks only become losses if you sell your shares before they’ve had a chance to recover.
It doesn’t feel good to see the value of your investments go down, but rest assured that 100% of corrections and crashes over the last 100 years have been followed by a recovery that more than makes up the losses. Where problems occur is when you’re forced to sell your investments before they’ve had a chance to recover. So, what do you do? Don’t invest money that you may need in the shorter-term and always have 3-6 months of emergency funds to get you through just in case something unexpected happens.
5. Time is your friend.
The longer you leave your money invested, the higher the probability of it performing better than cash. Here’s a graph that shows the percentage of times during the last 116 years that shares have beaten cash when held for five, 10 and 18 consecutive years.*
*Based on FTSE All-World Total Return GBP, Morningstar.