Back to The Future
Hindsight is notably cleverer than foresight.
In the movie Back to the Future II, Marty McFly’s (Michael J Fox) rival Biff travelled back in time to 1955 to give his younger self a copy of a sports book which listed the results of every major sporting event for 50 years. It allowed young Biff to bet correctly at the bookies every single time and as a result he became rich and powerful, eventually marrying Marty’s mom. Marty then had to go back in time to steal the book and prevent this disastrous alternate future from happening.
Wouldn’t it be great if we all had a sports or investing almanac like this? If you were someone who disliked uncertainty, this would be perfect as you would know all the economic troubles and negative world events that could befall you in advance, ostensibly investing with perfect foresight.
So, imagine you had this wonderful book in the early 90’s. Opening the book, you glance at the list of events that are about to occur;
1990s Recession - “The Jobless Recovery”
1992 Sterling Crisis - “Black Wednesday”
1994 Rwandan Genocide
1995 Oklahoma City Bombing
1995 BSE Outbreak - “Mad Cow Disease”
1997 Asian Financial Crisis
1998 Russian Financial Crisis and Default - “LTCM Collapse”
2000 Year 2000 Problem - “Y2K”
2000s Recession and Dotcom Collapse
2001 September 11 Attacks - “9/11”
2001 US Invades Afghanistan - “Afghanistan War”
2003 SARS Outbreak
2004 Madrid Train Bombings
2005 London Bombings - “7/7”
2005 Hurricane Katrina
2006 Mumbai Train Bombings
2008 Global Financial Crisis - “Subprime Mortgage Crisis”
2010 European Sovereign Debt Crisis - “PIIGS”
2010 Deepwater Horizon Oil Spill
2011 US Credit Rating Downgrade
2013 Boston Marathon Bombing
2014 Russo-Ukrainian War - “Crimea”
2014 West African Ebola Virus Epidemic
2015 Chinese Yuan Devaluation and Stock Market Collapse
2016 UK Brexit
2016 Trump Becomes President
2018 China-US Trade War
2019 Hong Kong Protests
2020 COVID-19 Lockdown, Recession and Stock Market Collapse
2021 Chinese Property Sector Crisis - “Evergrande”
2022 Russian Financial Crisis and Russo-Ukrainian War Part 2
2022 Inflation Spike, Monkeypox Outbreak
Would you even want to start investing? It looks like there is some crisis or some scary event every other year — and surely these troubles would put a giant hole in your portfolio.
But from all these years of investment and economic cycles about markets and investing, we have learnt that investing based on emotions and fear will not help you at all. Over the years, markets have rewarded investors even when uncertainty struck or economic activity was upended by some crisis. Investing because you had to reach a higher goal, would have yielded you positive results versus if you didn’t at all.
The chart below shows the growth of $1 invested in a global stock market index from June 1994 to Jul 2022 with all the past events overlaid.
$1 invested through all these crises would have grown to over 6 times its initial value — something that the almanac would not have told you. You can see that not all events created a similar type of panic or fear, so if you really wanted to avoid such events for fear of losing money, which were the ones to avoid? It would be really hard to tell — every crisis is “a first time” and every crisis looked like it could have sparked the end of the world.
The most common investor reaction when experiencing uncertainty, fearful news and a market sell-off is to sell (if they had invested prior) and wait on the sidelines. With all the negative sentiment, it is logical that markets would be affected by these terrible events. However, the impact of being out of the market for just a short period of time can be profound on your long term returns as shown by a hypothetical $100,000 investment shown below.
Investing and doing nothing throughout this entire period would net you $609,700. Over the same period, miss the best month and your total return drops to $551,192. The longer you stay out of the market, the chances that you miss the best months increase and your value drops dramatically.
The chart below shows when these best months occur and it is typically during higher volatility periods. Nervous investors who play it safe during such times would miss out these returns with detrimental impact to their long-term portfolio value.
One of the best ways to ride out such markets is to build a properly diversified portfolio around known evidence-based drivers of returns. It also means staying disciplined, with the help of your advisor to counter any behavioural problems, and sticking to the chosen asset allocation which was created to help you reach your goals at the lowest amount of risk possible. These processes do not require you to listen to what your “sports almanac” or what market gurus say.
Of course this does not mean that you ignore global events altogether, but given the right portfolio and allocation, reading or hearing about awful economic events may instead spur you to invest more at lower prices rather than run away in fear, maximising your future returns to catch those elusive best months. If you still feel uncertain about the current market environment, come and speak to us.
