Market panic and long-term investment: What can we learn from history.
“The message is overwhelmingly clear: a rejection of the stock market in favour of cash in response to a big market fall would have been very bad for wealth over the long run.”
After roughly a year investing, I have already seen some days like August 5th 2024, or for my portfolio the entire month of April 2024. While already controlling much better my nerves, a red day (or month) is not unusual in the markets and is always a psychological test. Keep calm and stay invested. Keep reading if you do not believe me (do not believe me, read on).
Last month the financial markets were shaken by panic following a negative employment report on the U.S. economy, which had previously shown strong growth. Stock markets around the world suffered significant losses:
• Japan's Nikkei dropped by 12.4%, its worst session since 1987
• Nasdaq fell by 6%
• London's FTSE 100 by 2%
• Spain's Ibex 35 by 3.5%
These declines erased gains accumulated over the past three months and led some analysts to suggest a potential recession in the USA.
Fearing prolonged market downturns, many investors withdrew their money, which, according to a study by British asset manager Schroders, was a mistake. Analysing 100 years of U.S. stock market data, Schroders emphasizes the importance of staying calm during crises, as patience is often rewarded. The study reveals that shorter investment periods increase the likelihood of losses. Probabilities of losses are:
• 40% chance of losing money – invested for just one month
• 30% chance of losing money – invested over one year
• 22% chance of losing money – invested over five years
• 13% chance of losing money – invested over ten years
• 0% chance (virtually, be cautious) of losing money – invested for more than 20 years
Schroders highlights that market crashes, like the one on August 5th, often result from impulsive decisions. The study also suggests that withdrawing investments in favour of cash after a market drop is detrimental to long-term wealth, as stocks generally recover over time.
Historical data shows that market turbulence is common, with significant drops occurring in about half of the last 52 years. Larger drops of 20% or more happened approximately once every six years. The study also notes that investors who sold their stocks after major crashes, such as the Great Depression or the 2008 financial crisis, often faced prolonged periods before recovering their initial investment value.
Schroders argues that staying calm and holding onto investments during such volatile periods tends to yield better long-term results. According to the study, investors who withdrew and later reinvested had an annual return of 7.4%, compared to a 9.9% return for those who remained invested throughout.
In conclusion, while past performance is not always indicative of future results, historical trends suggest that periods of heightened fear and market volatility have often provided favourable opportunities for long-term investment in stocks.
www.schroders.com/en/global/individual/insights/the-data-which-can-help-you-keep-a-cool-investing-head-in-a-crisis/$SDR.L (Schroders)... Show More
