A primary foundation and principle on which our investment philosophy and strategies are built is that markets are designed to cope with uncertainty and will often have to. Timing investment decisions around this uncertainty has been repeatedly proven to be an inaccurate science that can hinder performance more often than aiding it.
The current understanding of, and global response to, the virus is changing day by day. Markets are reacting to information as and when it becomes available and, arguably, are currently pricing in many unknowns. It is not possible to say, and would be irresponsible to predict, how markets will continue to play out over the coming weeks or months. Nor do we know when we will see, if we haven’t already, the turning point. However, what can help to put recent events in context is a brief look to the past.
Recovery after global crises
We have experienced a wide variety of global events over the past 20 years, many of which have produced similar market scares. Whether it be the aftermath of the dot-com bubble, SARS, the global financial crisis, the swine flu pandemic or the Ebola epidemic, markets have seen their fair share of challenging conditions. The following table shows the drawdown(1) and approximate recovery time of a representative balanced portfolio index(2) during some of the more notable of these events.
Source: data from Financial Express, 2020
(1) Drawdown (or maximum drawdown) is the greatest observed loss from peak to trough in the value of an asset before a new peak is attainted.
(2) The index used is the FTSE UK Private Investor Balanced. At time of writing, this index consists of c. 59.9% equities, c. 22.5% fixed interest, c. 8.0% cash and c. 9.6% other assets.
Taking a long-term view
Global crises could have caused a balanced portfolio to have fallen by around a third on two occasions over the past two decades, while global equity markets have experienced falls as large as 50% over the same period. Despite this, the long-term annualised return of global equities over the past two decades (as measured by the MSCI World Index) has been 5.59%. A return of more than twice that of the annualised UK base rate (2.38%) and almost three times that of UK inflation (CPI: 2.03%) over the same period. This illustrates how holding equities, even through periods of difficulty, can be an effective part of a long-term disciplined investment approach.
Timing the markets
Attempting to time markets can result in either short or potentially lengthy periods out of the market. Trying to get these decisions right can cause investors a number of issues. They have to make two correct decisions back-to-back: when to come out of the market and when to go back into it. This is notoriously difficult to get right with any degree of accuracy. Investors also often fail to remember that significant proportions of market movements typically occur on just a few trading days of the year. These days can of course occur at any point.
To demonstrate this, the following chart shows what effect missing some trading days can have on returns. It compares the annualised return on the FTSE All-Share over the past 15 years if an investor was fully invested for the whole period, against if they missed the best 10, 20, 30 and 40 days of the period.
Source: Fidelity International, ‘When doing nothing is best’, 2020 - Datastream, from 31.12.2004 to 31.12.2019, annualised return. Returns based on the performance of the FTSE All-Share, with initial lump sum investment of £1,000 on a bid-to-bid basis with net income reinvested.