27 Mar

Covid 19 - The importance of remaining invested

Our investment partners over at FE, recently published an information document considering the importance of remaining invested, looking at the lessons we can learn from history and how their investment philosophy - our DAM Portfolios -  are positioned to handle the inherent unpredictability of markets.

We have summarised the main points below:

Markets have moved through various psychological stages: denial, fear and panic seem to be making way for hope, relief and optimism.  This week has seen a strong recovery in equities, driven by solid and unified economic action plans from governments.  This combined support from authorities around the world has been viewed positively by investors.  The responses both fiscal and monetary, should filter through to the global economy in stages. While the pandemic progresses and economic stimulus gradually filters through, what should investors do during times of market stress?

Why it is important to look at what has happened in the past?

Every time markets fall the circumstances are different but there are some common features that are repeated. We are currently in a bear market: a term used to describe markets that fall 20% or more from their peak.  In the past, these have been noticeably shorter than the periods when markets have increased.  In the last 50 years there have been only eight occurrences where markets have fallen peak to trough by 20%.  There have been 621 positive months and 123 negative months.

In the intervening periods markets undergo a "bull run" where they increase in value from the bottom of a bear market trough.  These periods produce the best returns from investors.   The returns outweigh the falls and on average they last longer than bear markets. 

How does this look over a long period of time?

When these bull and bear markets are looked at in total, the picture looks very different over time.  The dot-com bear markets saw the S&P 500 fall 49% and at the time this seemed significant.  Fear was prevalent in markets and this fed through to everyday life.  But looking back over time, the falls were relatively small in the long-term context of markets. Many of the bear markets of the past are relatively small fluctuations.  Some don't register at all.

How long will this fall last?

There is only one period where investors experienced a negative 5-year return and this was during the dot-com recession.  This would suggest that the duration of negative returns for investors is relatively short.  Even at the close of business last week the fall in markets of 30% hasn't pushed 5-year returns into negative territory.  In fact, over the last five years investors are still up 80% and investors are much better off than in other market sell offs. Time and patience will overcome the unpredictability of markets.  We know that over time the gyrations and noise that we hear in the press will pass. 

Should the fall have been expected?

To put this in perspective, until last month markets have enjoyed one of the longest upward runs in history.  No one should expect financial markets to experience unbroken growth. The longer a bull run continues the more likely it is that we will suffer a fall. Before this recent correction there were many indicators that suggested equities may fall in value. 

As professional investors FE have remained calm as markets have adjusted; they expected it and could not time it correctly.  Knowing their limitations is an important part of their philosophy.  They have been considering the risks in our DAM portfolios, but have not sold out as they are aware of the risks with market timing.

Should I sell my investments?

FEs review of historic bull and bear markets indicates strong returns are often seen after a fall in markets.  Cheap valuations suggest returns over the next 10 years will be higher than before the fall. 

But if you sell and are out of the market on the best days in markets, it can significantly reduce the returns on your investment portfolio.  For example, missing just 10 of the best trading days in equities can reduce your annualised returns from 7.6% to 3.3%.  Missing additional gains over 20, 30 or 40 days, is even more detrimental to your returns and your financial plan.  Do you want to risk missing the best days or remain invested? 


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