Five reasons to be cheerful
It can feel like we’re living through a time of great upheaval. The truth is, we’re not. Yes, there is Trump and Brexit but the world is actually making tremendous progress. Did you know that despite the many wars and that big financial crisis, over the last 20 years the stock market (FTSE All-World GBP) achieved a positive return in 15 of those 20 years? That’s right, the market rose in all but 5 years over that period. And this is because over time our economies generally grow, companies become more profitable, employees become more efficient, people more productive, populations expand, and technology leads to new innovations.
As investors, here are some reasons to be cheerful:
1. You’re in the market
You’re investing each week or month. You’ll buy low, high and everything in between. Regular investing, no matter what the state of the market, gives you a higher probability of capturing the average return – about 7.9% in the last 20 years (for the FTSE All-World GBP).
2. You’re perfectly positioned to benefit in the long-term
The stock market rises over time despite many short-term setbacks. So, as tempting as it may be, try not to focus on the day to day fluctuations of the stock market.
Here are some probabilities for you…
If you were to invest for one day, you’d have a 55% probability of making a gain – about the same as flipping a coin. Hold for longer, however, and you can dramatically improve your chances.
Over one month, your probability of making a gain is 64%, over one year it rises to 82% and over 10 years it’s over 99%!*
3. Things are better than your amygdala would have you think
As soon as there’s a slight fluctuation in the market, we’re inundated with messages from the media that panic you to think about your immediate survival (whether it’s job security or the stock market). The part of your brain responsible for irrational fears, the amygdala, can easily convince you to panic and do things that aren’t logical. Rationally we all want to buy low and sell high, but when we’re in this state our emotions often lead us to sell when markets tumble and buy when they rise. Now, why would we do that? Remember, emotions are enemy number one in investing.
4. Although it all feels unpredictable, it actually isn’t
To borrow some terrible clichés; after winter comes spring, if you want the rainbow, you’ve got to put up with the rain. On average in the US there has been a market correction (a drop of at least 10%) every year since 1900 – so we should all get used to them. Historically the average correction has lasted 54 days and the market has fallen only 13.5% – so you don’t need to worry unnecessarily. 80% of these corrections don’t ever turn into bear markets (a downturn of 20% or more).
Don’t forget, every single bear market in history has been followed by a bull market (when stock prices rise by 20%).
5. You know Warren Buffett’s secret
“Trying to time the market is the number one mistake to avoid.” Selling up and being out of the market can be extremely costly. For instance, if 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 ten 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%!
Even though your instincts would tell you otherwise, getting out of the market can be the costliest mistake of all. A JP Morgan study found that 6 of the 10 best days in the market over the last 20 years occurred within 2 weeks of the 10 worst days**.
With this knowledge, sit tight and continue to focus on the long-term and your financial goals. This isn’t the first time this year that stocks have slumped, and it won’t be the last time it happens to you as an investor. Remember, for the last 200 years, the stock market has been the best place for the longer-term investor to build their wealth.
*MSCI Developed Equity Markets with after-tax dividends reinvested, priced in GBP. December 1969-June 2016
**In the S&P 500 Total Return Index
Investing should be regarded as longer term. The value of your investments may rise and fall over time and you could get back less than you invest. Past performance is not a guarantee of future performance.