Over the past few years, we’ve all witnessed a myriad of impactful world events, many of which have had a negative effect on global stock markets.
Events including the Covid-19 pandemic, Donald Trump’s election as president of the US and Russia’s invasion of Ukraine have all occurred within a relatively short space of time. As 2023 unfolds, further economic and political uncertainty is making waves in global stock market returns.
It’s natural to feel a little bit nervous about these events, and how the resulting stock market volatility could affect your long-term wealth. But, as the following pieces of data will show, keeping a cool head and staying invested in your portfolio could be the most sensible course of action.
1. Negative world events have happened throughout history, but markets tend to bounce back
When you look back across history, you’ll notice that seismic events like Covid and the war in Ukraine have happened at regular intervals. What’s more, while each one has caused some volatility, the markets have continued to show an upward trend.
The graph below shows some of the world events that have affected global stock market returns since 1988.
Source: Humans Under Management, Bloomberg. Returns are based on the MSCI World price index from 1988 and do not include dividends. For illustrative purposes only.
While each event may have had an immediate impact on markets, over the course of the timeline, returns trended upwards. In fact, according to Humans Under Management, the average annual return for the MSCI World price index across this period was 5.88%, excluding Dividends of circa 2% p.a., despite some fairly significant drops in value along the way.
The Covid-19 pandemic illustrates justhow small the effects of a major world event can be on stock market returns.
Morningstar reports that, while US equities fell by 20% in real terms between December 2019 and March 2020, initial losses were recovered by July 2020. Beyond this date, the index continued to grow. This particular market downturn was therefore one of the most severe in recent history, but also one of the fastest recoveries.
As you can see, a single negative world event may not have a lasting impact on your portfolio. Indeed, the impact on your overall wealth may be far smaller than you initially predicted.
2. Market drops of 10% are common, but long-term returns are usually positive
If you were to notice a 20%, or even a 10%, drop in the value of your portfolio in a month, you might consider this to be a very worrying development. You might even wonder whether it’s time to cut your losses with these investments in favour of a fund that had experienced again.
But in fact, this kind of fluctuation happens quite frequently on the stock market. You can see just how common these sorts of drops in value are when you consider the somewhat turbulent nature of the US stock market in the 50 years leading up to 2022.
As the below graph demonstrates, the MSCI USA index experienced a drop of 10% in 28 different years, and a drop of 20% in 8 of the 50 years.
Source: Schroders. Data to 18 May 2022 for MSCI USA index. Past performance is not a guide to future performance.
Despite this, Schroders reports that the index generated average returns of 11% a year, suggesting that even with a significant drop, the positive returns generated can often recoup losses over time.
Once again, the year 2020 provides a great example of this. The graph above shows that the index suffered a drop of more than 30% at one point in the year. But according to MSCI, the annual return for that year was 21.37%. If you’d removed your money from the index when the drop happened, you’d have likely missed out on some excellent returns when the market bounced back.
Your brain is always on the lookout for things that pose a risk to your safety, which is why you are more likely to notice and remember the times when your portfolio dropped in value. But it’s important to also remember the positive returns that your portfolio has generated to reassure yourself during those more difficult weeks or months.
3. Staying invested during market declines historically grows your wealth more quickly than moving to cash
Sometimes, market fluctuations can be so worrying that you feel tempted to move your investments into cash to avoid further uncertainty. The emotions that accompany this kind of volatility can be very hard to ignore.
But while cash might seem like a “safer” option than stocks because your investment typically can’t drop in value, the lower returns that cash investments offer mean it could take far longer for you to recoup any losses you suffered on the stock market.
Data from Schroders has shown how many years it would have taken to recoup losses depending on whether you kept your money invested through historic market declines or moved it into cash. As you can see, it took much longer for cash savings to recover losses than stock market investments.
Source: Schroders. Monthly cash return 1934 – 2020 based on 3-month Treasury bill, secondary market rate; 1920 – 1934 based on yields on short-term United States Securities; 1871 – 1920 based on 1-year interest rate. 1871 – 1920 data is only available annually, so a constant return on cash has been assumed for all months during this period. Other data is monthly. All analysis is based on nominal amounts. Past performance is not a guide to the future and may not be repeated.
If you had moved your investments to cash after the first 25% drop following the dot-com crash in 2001, for example, you still would not have recovered the loss more than 20 years later. But if you’d stayed invested in stocks, you would have recovered your initial losses in just 4.1 years.
While there are sometimes important reasons for moving your investments into different funds or wrappers to suit your risk profile and personal circumstances, doing so in response to market volatility could be an unwise choice.
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Even though past performance is no guarantee of future performance, hopefully these graphs and datasets have helped to reassure you about the long-term potential of your investments, even when markets are volatile.
If you’re concerned about how your investments could be affected by the current uncertainty, we can help. Either contact your financial planner directly, email us at email@example.com or fill in our online contact form to organise a meeting and we’ll get in touch.