Thunderstorms and Growth Spurts

My daughter fears thunder. On a recent night, there was a fierce storm, the thunder shaking the windows. She woke up, called out to us and I went to comfort her. As I did so, I pondered the severity of thunderstorms, from light drizzle to natural fury inflicting devastation. This got me thinking about financial markets.

Throughout history there have been multiple market events. We can’t tell when these will happen, and we can’t tell how severe they will be. Some of them are short and of comparatively little impact and others will have effects that are felt for months or years and do great damage. This year has been the latter.

There have been few places for investors to take refuge. Global inflation has run wild and central/reserve banks have been tightening interest rates to attempt to bring it under control. This, combined with the supply constraints and price rises in natural resources/commodities caused by the Russia-Ukraine war, and a struggling China, has made for a perfect storm. Equity markets are down. Bonds have been hammered (when interest rates rise, the market price of bonds fall to compensate). Resources provided some support early in the year, but fears of a global recession have investors worried about global resource demand. So this has also started to taper.

The thing about thunderstorms is that they do eventually come to an end. And it is at that moment that investors can experience incredible growth. Kids, too,  go through growth spurts at unexpected times. In the days after that thunderstorm, my daughter was suddenly eating more, sleeping more, and grew an extra couple of centimeters very quickly.

Similarly, growth in markets is non-linear, very difficult to predict. There is a saying that goes: It is not about timing markets, but more about time in markets. Research from JP Morgan Asset management shows that over the last 20 years: the best days of market performance occurred after big market declines. If someone had invested $10 000 in the S&P 500 index on 1 January 2002 and had stayed invested for the next 20 years (through the 2008 global financial crisis and Covid19 market crash of 2020) they would have $61 685 today. If they had missed the 10 best days of performance during that 20-year period, they would have $28 260.

Avoiding loss in the short term, selling immediately after experiencing a loss, can be detrimental to your portfolio’s performance in the long term. Having a well-diversified portfolio and riding out the storm is simply the best course of action.

My Dad started contributing to his retirement fund when he started working in 1973. He retired in 2017. In those 44 years there were multiple global financial crises, market bubbles bursting, market crashes, wars et al. He kept contributing every month and never touched his pension. I remember Dad coming home in 2008, white as a sheet. “What’s wrong Dad?”, I asked. “I just got my latest pension statement. It’s gone backwards” he said. Thank goodness he stayed invested, because the next several years were some of the very best market performance his pension had. He was able to retire with enough to meet his needs. It would not have been possible had he dramatically changed his portfolio or not stayed invested through the good times and the bad.

This is not to say that watching your investments decline is easy. It isn’t. Human nature wants us to spring into action, to do something, get on top of the situation. During the tough times the best thing we can do is stay invested and wait. This thunderstorm we are in will eventually end. If we make dramatic, knee-jerk changes, it is unlikely our portfolio will truly recover.

If you’re struggling to digest this difficult year we’re having, I’d urge you to chat to a Certified Financial Planner Professional®. They’ll hopefully be able to put all of this into perspective, help you work through it, put a plan in place and help you stick to it. History shows there will be unexpected periods of growth ahead of us. We want to be in markets to share in this. Thunderstorms come. As do growth spurts.

Written by Brendan Dunn for Honest Money Podcast

Portfolio Management Support at Galileo Asset Managers