Imagine it’s the start of 2020 and a stranger tells you what’s going to happen over the next 3 years:
- A global pandemic, forcing the world into lockdown,
- A cost of living crisis, with double-digit inflation,
- The end of ‘free money’ (i.e. interest rates rising sharply from near-zero levels),
- A continued shift towards populist politics and a trend of deglobalisation generally,
- War in Ukraine and Israel,
…would you invest in the stock market knowing these events were going to happen? And could you stay invested?
If you had, you’d be sitting on sizeable gains. Despite these events, global equities (according to the MSCI World Investable Market Index ‘IMI’) are up c. 56% to the end of March this year, or +14.7% pa annualised.
Disclaimer: When investing, your capital is at risk. The value of your investment (and any income from them) can go down as well as up, and you may get back less than you invested, particularly where investing for a short timeframe (we normally recommend a horizon of at least 5 years). Neither simulated nor actual past performance is a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Climbing the ‘wall of worry’
The point here is that there are always reasons to feel cautious when investing - we live in a time of extreme uncertainty, amplified by a negativity bias in mainstream media – bad news sells more papers (or gets more views) than good news.
However, history tells us that whilst economic crises, wars and other global events can cause considerable short-term volatility - for example, at the height of the pandemic in 2020, global stocks lost a quarter of their value in the space of just 3 months - over the long-term, companies and therefore stock markets have proved highly adaptable and rewarded investors that can ‘stay the course’.
This is well illustrated in the chart below, which shows the performance of the Morningstar Global All Cap Target Market Exposure Index (a proxy for global equities) since the start of 1970, along with the major global events over the interim period. That includes:
- An inflation crisis (mid-1970s),
- Black Wednesday (1992),
- The bursting of the dot-com bubble (1999-2000),
- The 9/11 attacks (2001),
- The Global Financial Crisis (2007-08),
- The European Sovereign Debt Crisis (2011), and
- The COVID pandemic (2020).
Despite all of these events, global stocks have returned an average 12% a year during this period:
Investing in human ingenuity
Investing in financial markets is uncertain – it always has been, it always will be.
Over the last 50 years, there have been a lot of negative surprises, but there were a lot of positive ones too. The net result was a healthy stock market, delivering returns well above inflation and the equivalent returns on cash savings.
This is a tribute to human ingenuity which has created incredible innovations that have driven continued economic growth – think of the ways we communicate, work, travel, etc. and how different these are from ten years ago, let alone fifty.
In reality, no one knows what is going to happen in financial markets over the next few weeks or months. But investing is a long game. Investing in stocks will always be uncertain, but as long as you have faith in human ingenuity to (continue to) solve problems, it remains a compelling prospect for long-term investors.
As the adage goes, ‘bears (those with a pessimistic view towards the prospects for the stock market) sound clever, but bulls (optimists) make money’.
Disclaimer: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. Since I don’t know your specific situation, none of this information should be construed as tax or financial advice. It is not an offer to purchase or sell any particular asset and it does not contain all the information which an investor may require to make an investment decision. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles.
