Data which helps investors keep a cool head in a crisis

The upsetting scenes in Ukraine sent shockwaves through us all as individuals and also through global stock markets. However, as in all periods of crisis, investors should try avoid making rash decisions in the heat of the moment. Here is some historic data and analysis which can help you do just that.

09/03/2022
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Stock market investing is very risky in the short run but less so in the long-run – unlike cash

Percentage of time where investors would have lost money in inflation-adjusted terms

percentage-of-time-where-investors-would-have-lost-money

Past performance is not a guide to the future and may not be repeated.

Stocks represented by Ibbotson® SBBI® US Large-Cap Stocks, cash by Ibbotson® SBBI® US (30-Day) Treasury Bills. Data January 1926-January 2022. Source: Morningstar Direct, accessed via CFA institute.

Using almost 100 years of data on the US stock market, we found that, if you invested for a single month, you would have lost money 40% of the time in inflation-adjusted terms (specifically that’s 460 of the 1,153 months in our analysis).

However, if you had invested for longer, the odds would shift dramatically in your favour. On a 12-month basis, you would have lost money slightly less than 30% of the time. Importantly, 12-months is still the short-run when it comes to the stock market. You’ve got to be in it for longer.

On a five-year horizon, that figure falls to 23%. At 10 years it is 14%. And there have been no 20-year periods in our analysis when stocks lost money in inflation-adjusted terms.

Losing money over the long run can never be ruled out entirely and would clearly be very painful if it happened to you. However, it is also a very rare occurrence.

In contrast, while cash may seem safer, the chances of its value being eroded by inflation are much higher. And, as all cash savers know, recent experience has been even more painful. The last time cash beat inflation in any five-year period was February 2006 to February 2011, a distant memory. Nor is that something that’s expected to change any time soon.

10%+ falls happen in more years than they don’t – but long-term returns have been strong

The biggest stock market falls of each calendar year

 

the-biggest-stock-market-falls-of-each-year

Past performance is not a guide to the future and may not be repeated.

Source: Refinitiv and Schroders. Data to 31 December 2021 for MSCI USA index.

In the days after Russia’s invasion of Ukraine, global stock markets had fallen by 10% from their earlier peak.

10% may feel like a big fall but it’s actually a regular occurrence. The US market has fallen by at least 10% in 28 of the past 50 calendar years – that’s more often than not. In the past decade, this includes 2012, 2015, 2016, 2018 and 2020.

The key point to note is that despite these regular bumps along the way, the US market has returned 11% a year over this 50 year period overall.

The risk of near term loss is the price of the entry ticket for the long term gains that stock market investing can deliver.    

Bailing out after big falls could cost you your retirement

Bad news and uncertainty of any sort can cause volatility in markets. When that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash.

However, our research shows that, historically, that would have been the worst financial decision an investor could have made. Switching from the stock market to cash after an initial market fall pretty much guarantees that it would take a very long time to recoup your losses.

For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, would have had to wait until 1963 to get back to breakeven. This compares with breakeven in early 1945 if they had remained invested in the stock market. And remember, the stock market ultimately fell over 80% during this crash. So, shifting to cash might have avoided the worst of those losses during the crash, but still came out as by far the worst long-term strategy.

Similarly, an investor who shifted to cash in 2001, after the first 25% of losses in the dotcom crash, would find their portfolio still underwater today.

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.

Giving up on the stock market after big falls can be a bad financial decision

Number of years to recoup initial losses

giving-up-on-the-stock-market

Past performance is not a guide to the future and may not be repeated.

Source: Federal Reserve Bank of St. Louis, Robert Shiller, 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 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.

As with all investment, the past is not necessarily a guide to the future but history suggests that periods of heightened fear, as we are experiencing at present, have been better for stock market investing than might have been expected.

Important information:

This document is marketing material. This document is provided by the author and may not necessarily represent views expressed in other Aspect8 communications, strategies or funds. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. The sectors, securities, regions and countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Aspect8 does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Aspect8 has to its customers under any regulatory system. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. This content is issued by Aspect8 Limited, Holmwood House, Broadlands Business Campus, Langhurstwood Road, Horsham, West Sussex, RH12 4QP. Registered No. 07572431. Aspect8 Limited is a member of Best Practice IFA Group Ltd which is authorised and regulated by the Financial Conduct Authority FCA No. 227247.

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