The news at the moment seems like a relentless assault of doom and gloom; apparently Greece is about to leave the Euro (the so called Grexit), Spain is on the verge of bankruptcy as their biggest banks need bailed out and the cost is more than the entire amount available to the Government from the last Euro bailout fund, the Euro is about to hit an iceberg and sink like the Titanic drowning everyone on it and even those nearby will be dragged under by the currents. Feeble US jobs growth is stalling the US recovery and China is no longer growing and providing support for all the other basket case economies.
Hold on a minute!
Let’s take a moment and put it all in perspective.
The UK stock market, as measured by the FTSE All Share index, fell by a total of 6.8% during the month of May.
A fall of nearly 7% in a month is not good news. And the conditions in the market place at the moment are not ideal but how does it compare to previous market events?
In October 1987 the FTSE All Share fell by 26.5% in a single month. In march 1974 investors lost 20.3% in a single month. September 1981 down 16.4%. November 1974 down 14.7% and July 1966 down 13.43% in a month.
Will the current turmoil reach similar depths?
Possibly but nobody knows. Short term market movements are simply not predictable.
The recent falls in markets around the world are the result of extreme negative sentiment and uncertainty. We know from history that markets tend to exaggerate both good and bad news in the short term.
Markets often recover very quickly and unexpectedly when all of the news is at its bleakest. In January 1975 the FTSE All Share rose 53.7% in a single month (91.3% over a two month period). By the time investors who were sitting on the sidelines in the safety of cash noticed that conditions were becoming more favourable they had missed the chance to double their money (or recover their previous losses). This was an extreme example but in October 1959 the market gained 18.6% in a single month. January 1989 14%, March 1979 12.6% and so on. Market returns are often clustered in very short bursts. Investors who try to time the market invariably get their fingers burned by selling investments after major losses and buying back after the biggest gains have already passed.
Looking at individual months is all very well but what about the longer term?
The FTSE All Share index fell by 43% between the 1st of January 2000 and the 7th of March 2003. Everybody was pretty depressed then as well. However, between March 7th 2003 and October 12th 2007 the FTSE All Share rose 138%. Admittedly much of this increase was simply recovering the previous falls but the market still returned a total of 35% from the start of the decade.
Over the next 2 years, until 2nd March 2009 the FTSE fell 44% in the wake of the banking crisis that resulted in Lehman Brothers and Bear Sterns going bust, RBS and Northern Rock being nationalised and others being forced to merge (Lloyds and Bank of Scotland). At that time many investment “experts” believed that stock market investing was dead. A little over two years later (5th of July 2011) the FTSE All Share index was up 86%.
The FTSE All Share index is actually up 28.3% since 1st January 2000; a period which includes three major downturns.
Fortunately, we don’t need to try and time markets. Instead investors who diversify across a broad range of assets and apply a disciplined rebalancing strategy that forces the sale of some winners to buy other assets that are cheap provides a much less turbulent investment experience.
May was a bad month for most stock market investments but bonds didn’t do badly. As a result an example diversified investor with 40% of their portfolio in Defensive assets (Cash and Fixed Interest securities) and 60% in Growth assets (property and shares) would have seen their portfolio fall in value by less than 3%. OK it’s not great news in the short term but in the long run a diversified portfolio will provide returns well above cash and inflation.
Time and time again markets have a habit of surprising us all. That is why we never advocate trying to time when to buy or sell shares. Today is no different from any other turbulent period in market history. Markets have been in similar “crises” before and will be again but over the last 113 years (a period which includes the current turmoil, the great depression, two world wars, hyper inflation etc etc etc) the UK stock market provided a return of 9.4%pa.
As we all stop to enjoy the bumper length bank holiday to mark Queen Elizabeth II Diamond Jubilee I thought it might be interesting to look at the return from the UK stock market during her reign. Unfortunately, FTSE All Share index data only goes back to February 1955 but this covers most of the period in question. An investment of £1 with dividends reinvested would have grown to nearly £60,000 today ( just under 12%pa). The figure is merely indicative as investors can’t actually invest in the FTSE index and the index takes no account of any charges an investor may have faced. It does, however, make a serious point about the value of long term investing.