The best way to approach investment during a crisis

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While a downturn on the markets is never pleasant, we know from past experience that they do not last forever. 

Markets need a degree of stability and as we are currently in a period of immense change; when markets are rattled they fall sharply, and the period is painful for investors, but these periods are usually short lived in investment terms.

The chart below shows the FTSE All Share stock market since the year 1900. 

We can see that, of all of the big sell offs over the past century, none lasted more than three years and the worst period was the ‘Great Depression’ which was then compounded by World War 2. 

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When the value of your fund is falling, it can be very difficult to look past the ‘now’. But it’s important to remember that you do not invest for the ‘now’, you invest for the longer term, the future. 

If you do not invest your money, it will deflate over the longer term because of inflation, which is a guaranteed loss. Financial investment means accepting the falls, staying focused to the longer term objective of increasing your wealth, and riding out the negative periods in spite of how painful they are. 

You may feel, as an investor, concerned with all the noise in the Media about the markets, but you will only lose if you sell and create that actual physical loss.  

Staying in the market means a paper monetary loss but not a real loss. It is just a lot lower than it looked on a portfolio report a month ago. This time next year it could well be a lot higher, and in ten years just another blip on an otherwise upward rising chart.  

Global markets win more than they lose. 

If we look at the Ibbotson large company stock index (below), since 1926 to 2019 the markets were down 27% of the time on a ‘year on year’ basis. Looking at 5 year annualised returns, the markets were down only 13%. This was not helped by the Great Depression followed by World War 2.  There were no negative periods over a 15 year spread.

The above demonstrates why it is so very important to look through the ‘now’ and take the longer term view to financial investment – this is the best way to approach investment during a crisis. 

Trying to predict and play the markets is a losing strategy. There is a common investment adage that says: 

“It’s time in the market, not timing the market”. 

What that means is that it is better to invest in the markets and leave your investment there, rather than trading when there is volatility and attempting to guess when is the best time to buy and sell. 

As you can see from the chart below, missing out on the best performing days of trading can seriously damage your returns over the longer term.

The light green bars show the achieved return in each calendar year if the investor had missed out on the ‘single best performing month’ that year. 

The dark green line indicates the return the investor would have achieved by staying in the market the entire time.

In growth markets staying invested works as a strategy year in and year out. 

My advice, as hard as it is and as desperate as you may be feeling, is ride the wave. Markets will stabilise, there may be a period of global recession, but we are a capitalised society and clever minds will be looking at recreating wealth in their industries, and markets will recover;  just do not try and guess when that may be.

Keep safe and best wishes

Hannah Goldsmith

This book is a detailed study of the wider issues that drive the performance and fee behaviour in the retail investment market and makes a lot of sense given the changes over the past 10-15 years.

There are some cold hard truths out there that all of us with pension funds and capital to invest need to think about seriously given the way the market now works and how risks present themselves. A well-researched book with some compelling conclusions, well done Hannah.

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