Being Bold in Uncertain Times

24 Mar Being Bold in Uncertain Times

‘When others are fearful be greedy and when others are greedy, be fearful.’

This quote from Warren Buffett underpins his investment strategy, and is a useful motto to fall back on in times of crisis.

Financial markets have fallen by up to a third at the time of writing, and investors are understandably concerned.
But this is how investing works. We assess your risk tolerance and your capacity for loss for this very reason, because at some point there will be a dip and investors need to be realistic about how they would cope. The ‘losses’ are notional only, until you actually withdraw money and miss out on the recovery.

By now, most experienced investors (and clients of financial advisers) are familiar with the drill. Stay the course, don’t make decisions based on fear, trust in the strategy.

We would also encourage many of our clients to take it a step further. With the markets having fallen to around 2010 levels, it could be the ideal time to invest.

Should You Invest More Money?

While we strongly believe there will be an upturn within a reasonable timeframe, we would not encourage everyone to empty their savings account and start buying FTSE 100 shares. Investing now may be for you if:

  • You don’t need to access the money for at least 5 years.
  • You can deal with further losses and won’t be tempted to withdraw before the market recovers.
  • You have a sensible emergency fund available.
  • Your investment strategy is well-diversified.

With these caveats in place, let’s look at some of the data in support of a bold investment strategy.

What is a Bear Market and How Long Will It Last?

A bear market occurs when share prices fall amidst negative investor sentiment. A world event occurs (for example, a sub-prime mortgage crisis or global pandemic), investors become nervous and they start to sell shares. Other investors see this, and want to withdraw their own money before things get worse. Of course, this is the very thing that makes things worse… and so it continues.

A typical bear market lasts for 20 months and results in a market dip of around -36.5%1. While investors may be worried during this time, we must emphasise – we knew this would happen at some point. We all signed up for it when we invested money in the stock market.

The good news is, bull markets (rising share prices, boosted by investor optimism) not only last longer, but make up for historic bear markets many times over. A bull market lasts, on average, for 7 years, and increases share values by over 500%.

Investing is the proverbial one-step-back, fourteen-steps-forward. Of course, individual investments may perform differently and we do not know exactly how this bear market will turn out.

The following chart shows the duration and depth of every bull and bear market since 1926. You may recognise the Great Depression, the 1970s stock market crash, the early 2000s Tech Bubble and the 2007-8 Credit Crunch. You will notice that every bull market lasted longer than the preceding bear. Additionally, every bear market lost less that the amount gained in the previous bull market.

We have just emerged from a ten-year bull market, which added 212% to market values. A bear market is absolutely due.

Timeline-Chart-2020-B&B

Why Invest Now?

While the data hopefully provides some reassurance, does it help the case to invest more money now? What if the market falls further? What if you invest just at the wrong time? What if the pandemic gets worse and we lose Cineworld, Wetherspoons and Marks and Spencer?

All of this is a possibility. The magic bullet is not picking the right stocks or investing on a rainy Tuesday in March when the market hits a certain level. The key is much simpler, and yet so much more elusive.

Time.

We would not invest your money if you needed it in a year, and would encourage you to think carefully about investing if you needed it in five years. We are talking about a lifetime of investing, hopefully 50 years or more’ – to: ‘We are talking about investing for at least 10 years and possibly your lifetime.

Most investors know this, but still, most are plagued by the doubts mentioned above. Inertia will slow the recovery, as people ‘wait and see’ if it is a good time to invest.

If you have the money and the stomach for it, by investing now, you could ride the wave of the recovery in its entirety. Yes, you might lose a little at first, but if there was no risk involved, everyone would be doing it. And as markets are efficient, this would wipe out any advantage.

By anticipating a recovery, you are actually helping to bring it forward, as prices rise and market confidence is restored.

To return to the wise words of Warren Buffett:

‘The stock market is a device for transferring money from the impatient to the patient.’

Please don’t hesitate to contact a member of the team if you would like to find out more about our investment outlook.

1 https://www.betafolio.co.uk/facing-the-bear-market-of-2020/