When it comes to investing – patience pays

Investing in stock markets is designed to deliver returns over the medium to long-term. In uncertain environments some investors get nervous, losing sight of their investment objectives. Many are tempted to postpone new investments, and even to sell their current holdings with the aim of reinvesting when the stock market rebounds. However, if your client does sell their investments during a correction, they risk turning a potential loss into a real one and they may miss out on any subsequent market rebounds.

Patience-when-investing-pays

 

Unnerving times

During these unnerving times, it’s important for investors to focus on their long-term goals and remember these three important things about investing;

  1. Stock markets go up over the long term
  2. Large peak-to-trough falls in value in stock markets are inevitable
  3. Historically, the biggest gains tend to follow the biggest falls

The challenge is, we don’t know when point 2 ends and point 3 begins but we do know that over time you may benefit from simply being patient and remaining invested. Right now, we recommend that clients speak with their Financial Broker about the options of sticking with their financial plan and staying invested in a fund that matches their risk-return appetite.

Warning: Past performance is not a reliable guide to future performance
Warning: The value of your investment may go down as well as up.

1). Stock markets go up over the longer term

Despite recessions, periods of stock market volatility, and wars, the US equity market, as represented by the S&P 500 total return index, has delivered a positive return in US dollar terms in 40 years out of the past 50 years; that’s 80 percent of the time.

SP-500-Yearly-Returns-since-1970

Warning: Past performance is not a reliable guide to future performance
Warning: The value of your investment may go down as well as up.

2). Stock market falls are inevitable

Despite strong market gains over the long-term there have been numerous large peak-to-trough falls in the S&P 500 total return index. If we roll the clock back to the 1950’s we see that big peak-to-trough falls in markets happen perhaps more regularly than we might think.  “Bear markets” are broadly defined as peak-to-trough falls of 20% or more.  In the below study, we look at the US Stock market, as represented by the S&P 500 total return index and include all falls of 19% or more in US dollar terms. This chart shows that falls of this magnitude occur roughly once every 5 years, average a dip of 30%, and the average peak-to-trough period is typically 1 year.

Stock-Market-fall

Source: Bloomberg, as at 32/12/19. S&P500 total in USD

Warning: Past performance is not a reliable guide to future performance
Warning: The value of your investment may go down as well as up.

3).The biggest gains follow the biggest falls

History shows us that markets generally bounce back strongly from large setbacks. Taking the same periods above and looking at returns over the 12-months that followed the sharp falls we see how quickly things can change.

Market-Returns

Source: Bloomberg, as at 32/12/19. S&P500 total in USD

Warning: Past performance is not a reliable guide to future performance
Warning: The value of your investment may go down as well as up.

“The stock market is a device for transferring money from the impatient to the patient”

Warren Buffett

The key message from these three points is that being patient and remaining invested can result in good outcomes. Even if you time things right and get money out as markets are still falling, you need to again time things well to get back in for the market bounce. In fact, by missing out on a very small number of days with strong returns an investor can ruin their longer-term returns. Right now, we recommend that clients speak with their Financial Broker about the options of sticking with their financial plan and staying invested in a fund that matches their attitude to risk and return. The below chart helps illustrate the power of remaining investing and the impact of missing out on those strong days:

Effect-of-missing-the-best-days

Source: Lipper,a thompson Reuters company, as at 31/12/19.  S&P500 total in USD

Warning: Past performance is not a reliable guide to future performance
Warning: The value of your investment may go down as well as up.

These three simple messages are well-understood by investors when things are going well but often get forgotten or questioned in times of stress. In Advice First Financial we are work hard to help or clients to manage their portfolios and the keep their journey smooth for their given level of risk. We ask for our investors to be patient and understand there will be times of unease and sometimes the best thing to do is remain patient.

 Any questions

If you have any questions or need advice, please feel free to give us a call on 074 910 3938 or Email us

Call us today in Letterkenny: 074 910 3938