When Markets are Falling, It’s Important to Keep Perspective
It’s not been a great year for investments so far. What started with a correction in the US tech sector has spread quickly to rest of the market both in the US and globally. The Russian invasion of Ukraine accelerated this downward trend, and rapidly rising prices are putting huge pressure on the margins of many companies.
So in the short-term, it’s not good news. But how do the recent stock market falls compare to previous market corrections, and should this change your long-term investment strategy? In this article, I’ll be answering these questions and reminding you of an investing phrase that I absolutely love – “when in doubt, zoom out”.
We’ve Been Here Before
At the time of writing, the S&P 500 in the US is down almost 20% so far in 2022. The FTSE 100 in the UK is faring a lot better, and is only down 1.22% since the start of the year. Regardless, most UK investors with a diversified portfolio will still be feeling some pain, as the US market tends to make up the largest component of many investment portfolios.
Whilst a drop of almost 20% doesn’t make for good reading, it’s also not that unusual when it comes to investing in the stock market. Throughout history there have been many stock market crashes, with an average drop of 27.5% from the market peak to the market bottom according to Bank of America.
Many of them have been significantly worse than that. During the Great Depression the US stock market fell 86%. The Nixon Shock in 1971 sent the market down 48%. The Dot Com Bubble saw a fall of 49%. The 2008 Global Financial Crisis dropped markets 57%, and the arrival of Covid-19 in 2020 spooked markets into a 34% fall. Needless to say, big falls are not unexpected when it comes to investing in the stock market.
The Importance of Perspective
With all of the doom and gloom around, it’s easy to become very pessimistic about your investments. It can feel like the safest option is to stay away. But as I mentioned at the outset, “if in doubt, zoom out”. What this highlights is the importance of keeping perspective on what is happening day to day, and how this will impact your investments over the long-term.
Despite all of the stock market crashes I listed above, many others I’ve not mentioned, the S&P 500 has provided a return of around 10.50% since its inception in 1957 through 2021. Investors who got nervous and pulled their money out when they didn’t have to, will have potentially lost out on huge long-term returns to their portfolios.
It’s understandable to get a bit nervous when markets are volatile, but it’s vital to remember that as long as your portfolio is diversified enough and you have a long enough investment timeframe, staying the course is likely to put you in a much better financial position over the long-term.
