The permanent challenge of temporary declines, and a healthy dose of vitamin C!

Investment markets are currently being very kind to investors.

Despite continued geopolitical uncertainty in Ukraine and the Middle East, markets worldwide have continued to give you above-average returns in a bull market that has lasted since the pandemic.

More significantly, since March 2020, there have been no periods of significant decline.

While this has been a very welcome respite from the normal market rhythm, there’s a danger that you will forget the important lessons learned from past falls, because triggers for market volatility still exist.

To prepare you for the potential of decline during the coming year, here are some points you should keep in mind when others are losing theirs.

Market corrections happen frequently

A market correction is defined as a 10% decline from a previous market high. While it may sound like a significant number, these events occur far more frequently than most investors believe. Indeed, historical evidence suggests they come around almost as often as your birthday.

Even more dramatically, you can expect a decline of about one-third every five years (on average), as markets experienced in the first quarter of 2020.

As you can see from the chart showing the Standard and Poors 500 over the last five years, markets do not move in a straight line. Instead, they fluctuate around a generally upward trend. We call this “volatility”.

Source: Google

Unfortunately, you cannot consistently predict ahead of time when these fluctuations will occur or when they will reverse.

To be a successful long-term investor is to accept the above with humility.

Remember your lifeboat drill

We know that it’s only a matter of time until the next perfectly expected market correction is upon us. We know to expect an average annual decline of around 15%. This isn’t news to us; we know it.

You may recall reading an article I published a couple of years ago, in which I made the analogy that preparing for a market downturn should be like a lifeboat drill. In other words, the time to hear about inconvenient truths is when the boats are docked in the harbour, rather than when you are out at sea.

I make no apologies for sounding like a broken record through constantly repeating this message.

The alternatives are that you may panic, and try to time the market, which could easily end up with you facing an entirely avoidable financial loss.

Along with lifeboat drills, another analogy to think of is the relationship your body has with vitamin C. You can only retain a certain amount, so your supply constantly needs replenishing. In the same way, repeatedly reminding you of this message can work in the same way.

Your mindset will determine how you react to a market decline

When a threat appears, it’s natural to want to run away. It’s how we’re wired. However, a market decline is not a lion. It’s a (mostly) harmless phenomenon that can only harm you if you react the wrong way.

Market declines will happen consistently over the course of your life, and your mindset when they occur is a choice that will determine your financial future. I recommend that you confront them with confidence rather than fear, mindful of the opportunities they provide.

Importantly, you have the luxury of being a long-term player in a system where everyone’s playing a different game. Contrary to the day trader, what happens in the next 30 days is unimportant to your 30-year plans. If you’re in it for the long run short-term performance should be of little consequence.

We know that stock markets provide positive returns about three in every four years. The negative year earns you the other three. It’s the price of admission for profiting from the collective ingenuity of the hundreds of companies working for you while you sleep.

I would encourage you to see any temporary declines as the reason for the stock market’s permanent returns. You can’t have one without the other.

Think of this encouragement as another shot of vitamin C!

Time heals all investment wounds

The stock market is a device for transferring money from the impatient to the patient. As you exercise the patience you’ll need to repeat many times in the future, be encouraged that you are busy earning future returns. If you’re still saving, declines are your best friend, allowing you to buy more units of shares at knockdown prices.

Success in life requires the practice of rationality under uncertainty, and to be successful long-term investors, it’s important for you to act on a plan rather than react to market movements.

I’m here for you as we continue to work on your plan together.

While we don’t know where the market will be in six months, we’re pretty confident where it will be in 10 years: much higher. Time is the enemy of market declines, and we’ve got plenty of it.

Get in touch

If you’d like to talk about your own investment plans, then please get in touch.

You can call me on 07769 156 250.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Equity investments do not afford the same capital security as deposit accounts.