During the COVID crash of March 2020, I published some timely reminders of our investment philosophy and points that are important to remember during times of market downturn and volatility. Whilst we aren’t seeing the degree of decline that we saw during February and March of 2020, 2022 has not continued on with the strong growth that we saw for the majority of 2021. As a result, I thought it would be valuable to reemphasise some of the key principles that we hold on to during volatile times to ensure that we remain consistent in our investment philosophy, and avoid reactionary movements as a response to events in the short term.

  1. We are not traders, we are investors – Traders look for short term positions and opportunities to try and make money in the moment. As a longer term investor, your focus isn’t on making your money today, but rather best positioning yourself for the longer term. You are not buying shares, you are buying companies. Traders will be trying to exit this market, investors should be recognising the longer term and holding tight.
  2. The value of a company – As I mentioned above, we are investors not traders, buying companies, not ‘shares’. The current share market is indicating that the world’s top companies are worth less today than they were last year. Sure, some companies will be directly affected by concerns relating to inflation and interest rates, but are the majority of the worlds companies really worth materially less than they were at the end of last year? Not a chance.
  3. Plans were set in calm, not panic – Your current investments, asset allocations and our overall investment philosophy was not established and set during times of panic, but rather during times of stability. These were based on research, long term outlooks, and most importantly, your individual goals and circumstances. These haven’t changed in times of volatility.
  4. Drown out the loud voices – More often than not, the loudest in the room panic the most, which is why you hear about it on the news channels. If 2020 and 2021 have taught anything, fear and panic sells well.
  5. It’s OK to be uncomfortable – When playing a long term game, there can be discomfort in the short term. This is completely normal, and has been since the beginning of time. Nothing worth having ever comes easy and stress free. It’s about riding through the discomfort and making it out the other end.
  6. It’s just a point in time – It’s so crucial to remember that what your account is ‘worth’ is only a reflection of a particular point in time. It changes every day, some days more than others. Don’t value yourself on one day, but value your plan and strategy.

The value of long term investing and riding the waves of market volatility cannot be understated. The S&P500 (The index representing the largest 500 companies in the US) started 1980 at a value of 106 points. Since then, it has ridden many, many waves – (it has been down more than 50% on two occasions in 2000-02 and 2007-09!) to be worth 4,589 points at the time of writing this article. It has had an annual compound rate of return of over 12% since the beginning of the 1980’s. You’re probably wondering how this would compare to the Australian Market? The ASX200 has ridden the waves too, and it has generated an average annual rate of return of more than 11% in the 42 years from 1980 to 2021.

In addition to the timeless principles listed above, another key point to consider is how often we see market corrections occur during years with that end positive. In the United States, the S&P 500 has gone through a ‘double-digit’ drawback (i.e. more than 10%) in two-thirds of all years, meaning that each year has a 66% chance of a double-digit drawdown at some point throughout the year. What is interesting to note on this data, is that in 3 out of 5 cases of this occurring, years that had a drawdown of more than 10% actually finished the year positive, and 2 out of this 5 ended positive by more than 10%*. While this is no guarantee of the year ahead, it does emphasise that a down month or quarter doesn’t always indicate a down year, and that the outlook can often be in fact be positive.

I hope the above points can provide some comfort and reassurance during potentially volatile periods. Please take comfort in the fact that you have a plan in place, a long term goal and you are on the path to achieving it. As always, I am here to take any calls or emails you may have at any time – day or night, weekday or weekend.


Data Source

Important Notice: The information provided in this post must only be considered general advice. It has been prepared without taking into account any persons individual objectives, financial situation or needs. Before acting on anything in the article, you should consider its appropriateness to you, having regard to your objectives, financial situation and overall needs.