What happens after investment losses?
“Life is like riding a bicycle. To keep your balance, you must keep moving.” – Albert Einstein
At times, it feels like the only thing that is going up are expenses and inflation, rather than our investments. We have been through a similar period before — during the pandemic in 2020, the financial crisis in 2008 - 2009, and the dotcom bust in 2000 - 2002.
Market crashes and economic downturns are a part of life. Although we have seen it before, it does not make it easier. But let’s not forget that there is always another bull market. Challenging performance years sets up better years to come!
Why are markets struggling?
Globally, inflation continues to be higher than expected. Foreign central banks are trying to keep up with the US Federal Reserve rate hikes to protect their local currencies and bring back price stability. High global inflation forced most central banks to increase rates, which led to a negative growth outlook and a sell-off in equity and bond markets. In South-Africa, the rand has had difficult conditions this year with the dollar’s increasing dominance and fundamental economic problems like load-shedding, high unemployment and labour strikes.
However, as they say: Every cloud has a silver lining it is important to remember that there can be great buying opportunities when prices are depressed.
How much is the market down year to date?
Markets fell to new year-to-date low and during the first three quarters of 2022, the S&P 500 has had its 3rd worst performance since the 1950’s. September 2022 was the worst month for equities since the Covid crash in March 2020.
The table below shows the deep market sell-off experienced in major equity markets around the world. The South African JSE All Share is the best performing in the selected indices below (albeit 23.9% down since the start of the year).
In a market downturn, you might consider selling and sitting out of the market. That approach could lead to selling low and losing future price increases and growth. It's vital to understand that market downturns will happen, and they will end.
Reasons to stay invested after a market downturn
· Downturns are followed by upturns
We all have loss aversion instincts (the pain of losing money is more significant than a similar gain), but if we sell when the market is down, we realise an actual loss.
An important lesson for many investors is if they sit tight, stick with their plan and wait for the recovery in the market, they won't realise a loss and probably see their portfolios gain more than before the market downturn.
The typical length of a bear market is around a year, compared with the average bull market that is nearly four years. The average drop of a bear market is 30%, but the average return of a bull market is 116%.
· You can’t time the market
“Buy low, sell high” – that’s the goal. Nevertheless, it’s easier said than done. When markets fall, it is instinct to want to sell out of the market. What is tricky about timing the market is that lots of the best days occur in bear markets or recessions and some of the worst days in the market occur during bull markets. Missing the best 10 days in the market can be significant! Stay the course. Like the saying goes: It is not about timing the market, but about time in the market. So instead of selling on the way down, try the opposite, by buying: Accruing more and building a portfolio with a lower cost basis.
· The strategy is to stay invested
Your long-term goals can accommodate it. Investors with a long-term investment horizon of 10, 20 or 30 years until retirement, will have more than enough opportunities to recover this year’s losses. Don’t throw your investment strategy overboard in the middle of the storm. Fight the urge to make quick decisions based on emotional biases. if you keep your focus on your long-term investment plan, emotions like fear and greed shouldn't change your actions. If we look at past performance and expectations, the forecast only emphasises our commitment to long-term investing. Markets have, historically, always regained their value.
We have been through many bull and bear markets and have learned one undisputable fact – no one can predict markets. History has shown that today's top performers are tomorrow's worst performers. The essential thing to bear in mind is that downturns in the market is temporary and the biggest risk is missing out on the growth in the market to come. The Optimum Investment Group team has the view, that it is best to stay invested. We have taken an informed decision not to promise top performers to our clients, but rather to focus on long term consistent and superior risk adjusted returns. To ride the dip and take advantage of the periods of often sharp recovery that tend to follow difficult economic conditions.