Brexit, Brexit, Brexit seems to be all we ever hear on the news. Occasionally interrupted by reports a recession could be on the horizon, rioting in Hong Kong, the US-China trade war and climate change-led weather events flattening places like the Bahamas or stopping the trains working back at home. None of it sounds particularly optimistic for either the UK or global economies. So if we are all going to hell in a handbasket and there’s a good chance the economy is about to tank taking the stock market with it, does it still make sense to keep making monthly payments into an investment fund?
If the stock market is really going to go down, wouldn’t it be a better to start again when it has all blown over? Why invest hard earned and budgeted money into a fund that drops in value? Better save it instead, even if miserly interest rates are below inflation. Right?
It’s a thought that might have crossed many minds around the UK in recent months. But also one that would be better banished for a whole host of reasons. No matter how bleak things might look, history has some very good lessons on why investors should ignore negative noise about the economy and keep on doing what they’ve been doing – through the good times and the bad. In fact, especially the bad.
The first reason why pausing contributions to an investment fund because of worries about the economy isn’t a tactic that should be seriously entertained is the simplest – the economy might be just fine in the end. At least for the foreseeable future.
Historically, modern capitalist economies, and stock markets, have always been cyclical. They go on a generally upwards streak then hit a rough patch and contract. Though usually not in perfect sync. Stock market and economic cycles can, and often do, drop out of step with each other and lag or lead by up to several months. Sometimes they show very little correlation. That’s because the stock market is not the economy – it’s just one part of the economy.
Which is why even the most experienced and successful investors in the world find it almost impossible to correctly time a bear market. Or they get it right once and wrong the next time. Of course, the books are written and films made about those times someone has gotten it right. But has there ever been a book or film made about someone repeating the trick? I can’t think of one and there’s probably a reason for that – it very rarely happens and if it does the second time is probably usually nowhere near as spectacular a success.
Economists are no better at forecasting recessions and the most respected will openly admit what they do is make a ‘best guess’ - that statistically has much more chance of being wrong than right. The reason why recessions have the impact they do is because they are almost always a surprise for most. And even harder to forecast than when a recession or bear stock market might take hold is how severe it will be. That one is really a case of metaphorically licking your finger and putting it in the air to forecast the weather.
Simply put, nobody knows with any certainty if a recession is really coming or not. It’s pretty certain ten years ago was not the last one that will ever take place. But when and how severe the next one might be is a guessing game.
And the good news is that after a recession or bear stock market, both cycles have always then returned to a positive direction eventually. Sometimes it takes just a few months and other times a few years. Nothing is written in stone about the future and there are no absolute guarantees the patterns of the past will repeat in the future. But all the evidence we have suggests they probably will – or at least not change completely and fundamentally.
So lesson one is that trying to time a recession or bad patch in stock markets is a thankless task. Lesson two is much more optimistic – you probably don’t have to worry about trying to if you are not on the verge or retirement or another reason why you might want to start cashing in investments.
When UK stock markets crashed in July 2007, the FTSE 100 had lost around 44% by the time the market bottomed in early 2009. Pretty terrible for an investment portfolio, right!? But last year the FTSE 100 was 15% higher than it was at its pre-crash 2007 peak. And that was with all the Brexit uncertainty around the UK. It was up over 105% since its 2009 low. So, yes, the average investment portfolio would have taken a heavy hit between 2007 and 2009. But a few years later those losses were largely recovered and a few more years later most well balanced portfolios worth more than before.
Even better than that is investors that had ignored everything and carried on investing through the crash would have made returns of up to over 100% several years later. Because they would have been buying the same investments as before at much cheaper prices. So the original investments recovered and new money put into investments while the market was down made great returns.
In fact, most experts and investment professionals are quick to point out that any investor more than ten years from cashing in should positively welcome a stock market crash as long as their personal financial situation remains stable. History shows losses will probably be recovered and, given time, a diverse portfolio will most likely bounce back to be worth more. Plus, investments made during a crash historically deliver the best returns, carried up with the recovery.
Which all adds up to the conclusion that as far as anything based on history can be sure, if you’re worried about negative economic grumblings hitting your investment portfolio for six – relax. The best thing you can probably do is just carry on doing what you are doing. And if there is a stock market crash – the best thing you can do based on the historical evidence is invest as much more as you can while prices are down. It could be the best thing to happen to your attempts to reach long term investment goals.