A Down Market in Perspective
If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
— Warren Buffett
A volatile market always brings out the anxiety in investors, causing many of them to wonder:
Is time to adjust my asset allocations?
Should I be selling some of my riskier equities to hold cash until the uncertainty passes?
Buffett’s quote suggests that if such volatility makes you think twice about owning investments, then perhaps investing is not for you. A good timeframe to mentally prepare for when owning stocks should be 10 years or more.
Keep in mind that volatility and downturns are part and parcel of investing, and it happens more often than you think. Remember that, the next time a market tumble makes you feel the need to “do something.” Downturns aren’t rare events by any means and as long-term investors we will experience many of them during our lifetime.
The chart on global stock market prices below shows that in the last 42 years, there have been 9 bear markets — these are defined as declines larger than -20% and longer than 2 months.
Whilst bear markets look scary in terms of capital losses, many bull market surges have been even more dramatic, and often lasts longer, leaving stock investors well compensated over the long term for the risk they took on. The diagram below shows the comparison between bear and bull markets. Overall, the global stock market has spent 70% of the time going up, and only 30% of the time going down. As long as you are holding a diversified global portfolio, staying put throughout the turbulence would have given you a long-term return over 7% in SGD terms.
Our philosophy when dealing with your investments is to primarily stay invested in good and diversified asset classes for the long term. Only in extreme scenarios would we initiate the protocol to reduce equities only to preserve your portfolio values in the short term. For the majority of other scenarios, rather than run away from stocks when the market downturn comes, we want to buy more of it. If your portfolio allocation includes bonds, we will use it to buy more equities when prices are low. Conversely, we will sell the equities when prices have reached a high and return capital to your bond allocation.
Let’s look at four different ways that an investor might respond during the highly volatile time in markets at the end of 2018. At that time, the concerns were the trade war and rising tensions between US and China, a slowing economy and a Fed ready to tighten monetary policy. The positions and their respective results of four different investors are as follows:
Investor 1 rebalanced and held through the turbulence
— The portfolio regained its losses and made higher highs.
Investor 2 went to cash during the worst week of the turbulence ostensibly to keep the capital safe, and went back to the market when the market began to recover.
— The portfolio did not recover to its previous highs.Investor 3 went to cash after the bottom and when the market was beginning to recover. Then, there was still a lot of uncertainty in the market.
— The portfolio flatlined at a level below its watermark.Investor 4 went to cash right when the news flow was at its worst and markets were at its most turbulent.
— The portfolio flatlined at an even lower level.
The key takeaway here is to take bad news in your stride. Volatility and market downturns are often not long-lasting. Dramatic market losses can sting for sure, but staying invested allows you to participate in the recoveries that typically follow. It’s important to keep a long-term perspective when investing, as long as you’re globally diversified and invested in good quality equities. If you need some guidance on how best to allocate and to ride through such scenarios, contact us for a second opinion.
