In particular we are concerned with dangerous myths which permeate our industry – believing these could destroy your hard-earned wealth in the years ahead.
Unfortunately, there is generational complacency (and some ignorance) about “risk investments”, which has been created by a 40-year bull market or uptrend. These are the sorts of investments which will typically populate your pension fund and ISAs.
The mantra is: “The market always recovers”.
For far too many this has resulted in the blind faith in “buy and hold”, or what we more fairly called “buy and forget”. This appears to be a core belief of far too many investors, advisers, and journalists – this is dangerous.
It is without doubt that there is impressive evidence on the attractions of investing – after all, we have frequently used it ourselves. Yet this can be a mis-leading veil over the unpredictability of investment returns on occasion – let me explain…
It was once believed there were no black swans in the world – in fact as far back as the 2nd century it was an expression used to describe that which was impossible. Then in 1697 Dutch explorers “discovered” black swans in Australia. Now it is more commonly used to describe the bias of those who believe something can never be, either through limited imagination or experience, combined with an unhealthy belief in their worldview.
Over the years we have frequently heard the refrain that “the markets always recover”. Perhaps. But even if your experience amounts to 30 years or more, you MUST allow for The Black Swan, in your planning – something beyond your experience, however extensive.
In particular you must allow for risks without precedent which,
if they occur, might destroy your life plans.
How about our grandparents’ experience? Would they have guessed that their lives would be consumed by two World Wars and The Great Depression? Oh, and not forgetting the 1918 flu pandemic which killed 50-100 million people around the world. Sometimes fate is just going to deal you a tough hand – and you have no idea it is coming.
What about Japan? Their stock market has been down for nearly 33 years. It suffered falls of 80%+ at worst, and is still down over 28% – after 33 years! If you were living in Japan in the late 1980s you probably had most of your investments in Japan, your home market – your financial plans were devastated.
The market is brutal in confronting investors with the fact that they are often wrong. It will always probe for basic human weaknesses – greed and fear, vanity and ignorance.
The point is not to get complacent about stock market returns, nor your ability to decipher them in advance. They won’t be delivered to you in a nice neat package with a ribbon, which happens to coincide with the timing of your life plans.
You have been lucky – don’t throw away that advantage!
We haven’t suffered as did our grandparents, or investors in Japan from the late 1980s.
We (you and I) have been lucky.
Those of us of a certain age have lived through, and accumulated our savings during, an unprecedented 40-year uptrend in our stock market, and those of developed markets generally, with the US market being pivotal.
The long-term chart shown below (Chart 1) illustrates the point, highlighting that 40-year uptrend or bull market in green. This is the US stock market since 1900, and this positive 40 years has been broadly followed by the UK stock market.
But what is “normal”? And what is the exception?
Look at the bottom left corner of that same chart, from the early 1900s up to 1920. There is a sideways and down market for about 15 years or so. Basically, you’re not making any or much money for quite a long period.
Something similar happened again from 1929 right up until the 1950s – more than 20 years, a long time to not be making any money.
Then again, we have the 1970s, ringed in the middle of the chart below, another 10 years of not making any money. Remember this is a US stock market chart – the UK was far worse than that, with 70%+ falls in one year.
Such ugly periods are quite normal.
What does not appear so normal is a 40-year uptrend we have enjoyed since 1980. The bursting of the tech bubble from 1999 was a notable interruption, and 2008 was undoubtedly a shock, but the central banks acted to prevent prolonged damage. However, as we have regularly highlighted, it is such action by central banks which has created the debt bubble, and underpins fundamental complacency and vulnerability across financial markets.
You need to understand that these sorts of negative periods, running for a decade and possibly more, are very regular occurrences. That’s normal. The bull market since 1980 looks more like an exception.
We do not need to be overly pessimistic. But we (and you) do need to be prepared for a range of possibilities, not all of which have been experienced in our investing lifetimes.
We do not know how the coronavirus crisis might unfold. No one does. It is certainly not necessary for us to speculate on that. Focus on what we know:
- We do know how vulnerable are financial markets…
- …and a shock will expose this vulnerability, dragging your investments sharply lower.
- Coronavirus might be that shock – though we can’t know for sure.
- We know we must prepare, and control what we can control…
…This means decide now how you will respond to falling markets.
This blog was first written on 13th March 2020, on the research hub of our sister company FundExpert. This will be particularly interesting for those advisory clients who are using our discretionary fund management (DFM) service, or those who are contemplating doing so.