1 August 2022

For generations, investors have ridden market rollercoasters and experienced peaks and troughs. As we once again find ourselves amid a widespread market correction, you’re probably asking yourself the following questions:

• Is it different this time around?

• Should I be selling my investments and waiting for things to calm down?

• What is everyone else doing with their money?

While market volatility can be unnerving, it’s also a fact of life. If history is anything to go by, those who stay the course and maintain conviction in their long-term investment portfolios tend to fare better than those who don’t by benefiting from the market’s recovery.

As Warren Buffett once famously said “the stock market is a mechanism for transferring wealth from the impatient to the patient” (Lighthouse Investments, 2017). While this may sound like nothing more than a nifty catchphrase, it is important to understand just how accurate this observation has been.

Take, for example, the performance of the All Ordinaries Accumulation Index over a 27-year period from 1995 - 2022. As outlined in graph below (AMP, 2022), the All Ords Accumulation Index returned a rate of 9.5% per annum for an investor that stayed the course during this entire period of approximately 6,800 trading days.

Were you to have missed the best 40 performing days during this period, your portfolio return would have reduced to a mere 3.3% per annum. Putting this in dollar terms, a $100K investment in 1995 would have grown to $1.16M in 2022 had you remained fully invested until 2022, compared to $240K had you missed the top 40 trading days. This demonstrates the importance of remaining fully invested and avoiding the urge to sell when your emotions (and perhaps the people around you) may be telling you otherwise.

Investment markets have a habit of recovering strongly following periods of negative returns and to illustrate this point, consider the chart below (Findex, 2022) that shows the performance of the S&P/ASX 300 TR (Total Return) Index. Every time this index has posted a negative year since 1990, it has been followed by a strong positive result in the following calendar year. In fact, not once during this thirty-two-year period did the Index post successive (two or more) calendar years of negative returns.

Don’t let volatility deter you

Market corrections are not uncommon and investors holding well-diversified and regularly rebalanced investment portfolios should not see these as a reason to change their long-term investment strategy. While negative periods will still be experienced with a diversified portfolio, the longer your holding period, the less likelihood there is of a negative return. As evidence of this, the graph below (Russel Investments, 2022) illustrates that a diversified investment portfolio of global shares and bonds has never produced a negative return over any rolling five-year period since 1980.

Of course, we cannot predict what markets will bring in the future, nor whether market conditions will deteriorate further, particularly as inflation and interest rates continue to bite. But if history is any guide, then we can confidently expect that a recovery will occur and once it takes hold, there is every chance that it will happen swiftly. Even the most seasoned investment professionals won’t be able to signal the beginning of this recovery when it begins, so the best way to fully participate is to remain invested now.

As always, the Findex Investment team continues to monitor markets closely and make asset allocation and investment manager adjustments that we believe will deliver the best outcomes for our clients. For more investment advice click here or get in touch.

Sources:

[1] Quote by Warren Buffett, Lighthouse Investments, September 2017

[2] Five Great Charts on Investing, AMP, May 2022

[3] S&P/ASX 300 data, Findex, Morningstar, 2022

[4] Russel Investments, Six Good Reason to Stay Invested, Publication, 2022