In periods of volatility, as we are having now, it is very easy to make poor decisions. Investors tend to react to market movements or “noise” and forget the big picture. We have been fortunate in the last 4 years that equity and bond volatility has been suppressed by central bank actions (QE or money printing). The current episode of volatility is more normal than exceptional.
It is not surprising that we are seeing more ups and downs in markets as it has been a long “time between innings” in terms of interest rate rises in the world’s most important economy, the US. After nearly a decade of “free money” the cost of debt is about to rise. I see rate rises in the US as a sign of strength in the economy and believe that markets will respond positively assuming China calms down.
But remember in the long run markets tend to go up, historically 70% of the time. The only problem is they tend to fall at a faster pace than they rise which can test the nerves of even seasoned investors.
Timing the market is tricky, you do get the odd win but missing the big up days can be detrimental to a fund’s performance. As shown below missing out on a few of the market’s best days can have a significant impact on a portfolio’s performance. In the charts below the total returns are calculated based on a hypothetical $100,000 investment in the S&P 500 Index over the last 20 years, NZSE 50 index since January 2001 and the ASX200 Index over the last 15 years.
Missing the best performing days can have a large impact on returns.
Percentage return of a $100,000 hypothetical investment in the S&P 500 Index over the last 20 years:
If you missed the best 5 days on the S&P500 Index over the last 20 years the value of your portfolio would be worth $181,353 less (-41%) than if you stayed fully invested. That hurts!
How does Australia look?
Percentage return of a $100,000 hypothetical investment in the S&P/ASX200 over the last 15 years:
If you missed the best 5 days of the S&P/ASX200 Index in the past fifteen years the value of your portfolio would be worth $72,803 less (-33%) than if you stayed fully invested. Also painful!
And what about New Zealand?
Percentage return of a $100,000 hypothetical investment in the NZX 50 Index since January 2001:
If you missed the best 5 days on the NZX 50 Index over the last 14 plus years the value of your portfolio would be worth $56,304 less (-24%) than if you stayed fully invested. If you missed the best 10 days in New Zealand your portfolio would be worth 38% less.
While this current bout of volatility looks set to continue for some time, it is worth remembering that markets have gone up over the long term despite wars, pandemics, terrorist events and depressions.
Shares have grown substantially overtime
A hypothetical $100,000 investment in the US S&P 500 index (500 largest US companies) over the past 40 years (1974-2014) would now be worth over $7 million dollars.
Diversification and patience are extremely important in volatile times, as it is hard to pick the winners consistently. Volatility is part and parcel of investing; it comes and goes, just like the passing of the seasons. We see the volatility as an opportunity to add to the best companies at cheaper prices. Yes it will be a bumpier road ahead, more ups and downs but if you can stomach the volatility, as the charts show, it has been best to stay in for the long haul.
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.