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A 30% Market Decline? Keeping Perspective. Blog 196

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A 30% Market Decline? Keeping Perspective. Blog 196

28th February 2022

Paddy Delaney

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“Daddy, the lady at dancing class had toes coming out of her eyes and coming out of her ears!”.

That’s what 4 year-old Emily told me yesterday through rampant giggles, and I’m not one to disagree with her! One big observation of recent years as a parent – is the wonderfully wild imaginations that kids can have. Depending on what they may have been absorbing recently, whether it’s Harry Potter stories or something lighter, such as ‘Cocomelon’ nursery rhymes, their minds can take a perfectly mundane daily event or encounter and turn it into a wild and scary thing. It’s a wonderful privilege to see and hear it in action. The tangible impact of their imagination running mad are little or none, at least in the short term! The imagination does not usually cause an action or event to occur.

However, the same cannot be said of the imagination of us adult investors, particularly in the face of actual horrific world events, and subsequent detailed coverage of market movements. Reading the home page of any media outlet over the past week may well have had you terrified about your finances, even on days when the markets movements were up! That is their intention – to keep you clicking and reading. Clicks = Revenue, never forget!

Perspective:

In the face of lots of negative market coverage, our imaginations can run wild, causing us to lose perspective. As a result, many can and unfortunately frequently do take action that hurts their financial futures directly. I counsel you to think long and hard about taking any action, provided you are well positioned to begin with.

I wrote about how to prepare yourself and your pension for the next crash last year in Blog 186. Despite one individual misunderstanding that entire piece, I wasn’t making any predictions about a crash, merely stating that the next ‘correction’ is never far away, if history is anything to go by…..

JP Morgan Annual Returns & Intra-Year Declines – Jan 2022 – Page 16

Using the S&P500 only, the above chart from JP Morgan Guide To The Markets shows us very clearly how far the market temporarily declined during each of the past 41 full years (signified by the red dot and red percentage figure). It also shows us the actual full-year returns for each of the past 41 years (signified by the grey bar and grey percentage figure).

The interesting take-aways from here, in my view are:

  • Every single year had temporary declines during the year, ranging from -3% (1995 & 2017) to as large as -49% (2008), in a year where it finished -38% for the calendar year
  • 2020, at the outset of the pandemic, the market fell temporarily -34%, but finished positive +16% for the full calendar year
  • The AVERAGE temporary fall during each of the past 41 full years has been over -14%, average!
  • Despite that, or indeed because of that, an equity investor has benefited from 9.4% AVERAGE full-year gains
  • They achieved this level of growth not by moving in and out of cash, but by staying the course and tuning-out the market mania

The events that cause markets to move are often tragic and awful – planes crashing into buildings, global epidemics, war and suffering of the masses. While we will empathise and suffer in our own ways, making decisions about your long term financial future based on these events has been proven to be folly of the highest degree.

Your Long Term Returns:

If you are accumulating assets to enjoy once you stop working for an income, or if you are already enjoying the fruits of your labour – here are some facts to help recognise where you are right now from an investment returns stand-point. More perspective if you will. As of opening on 28th February 2022….

  • Were you invested in a 100% diversified global equity portfolio since the start of 2022, your total return in that 2 month period has been in the region of -7%.
  • Were you invested in that same diversified global equity portfolio since Feb 28th 2021, your total return in that 1 year period has been in the region of +8%
  • Were you invested in that same diversified global equity portfolio since Feb 28th 2020, your total return in that 2 year period has been in the region of +24%
  • Were you invested in that same diversified global equity portfolio since Feb 28th 2019, your total return in that 3 year period has been in the region of +37%
  • Were you invested in that same diversified global equity portfolio since Feb 28th 2017, your total return in that 5 year period has been in the region of +50%
  • Were you invested in that same diversified global equity portfolio since Feb 28th 2012, your total return in that 10 year period has been in the region of +170%

Indeed, if markets were to fall by 30% tomorrow (not a prediction), we must retain our perspective, must remind ourselves of where the portfolio sits within our plan, what the impact of a panicked reaction could be on our future, and why all history points to a favourable long-term outcome. Provided we are well positioned at the outset!

Don’t let your imagination, as wonderful as it may be, cause you to do something you will likely be unable to financially recover from, and as history has shown us, will be a temporary decline and not a permanent one. Don’t do something you’ll kick yourself for.

Paddy.

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