Are you worried about what 2020 has in store for your investments? Of course you are. It’s only natural - the MSCI World index rose by 25.2% last year. Common sense says we must be due a correction.
Well, what if common sense is wrong? What if our in-built human instinct to spot danger around every corner is actually our worst enemy as an investor? What if keeping calm and carrying on really is the best policy.
To try and answer those questions I spent a happy hour or two this morning with 50 years of stock market data and a calculator. I know, it takes all sorts.
Here are some of the things I discovered:
- The global stock market (as measured by the MSCI World index in US dollars) rose in 36 of the past 50 calendar years and fell in 14
- The average movement in the 50 years from 1969 to 2019 was 8.0%
- In the years that the market rose, it gained an average of 16.8%
- In the years that it fell, the average loss was 14.5%
- There were 16 movements (up or down) of more than 20% and 35 of more than 10%
- Of the 16 20% moves, 13 were gains and 3 were losses
- Of the 35 10% moves, 27 were up and 8 down
- If you had bought the market at the start of a down year, it would have taken you on average 35 months to regain the level you entered the market - the range was 14 months to 80 months
- $1 invested in the MSCI index on the first day of the 1970s was worth $23.58 this morning. If you had re-invested the dividend income over the same period, $1 would have turned into $99.79
So, what do I conclude from these numbers?
- Worrying about what the stock market will do in the short run is a waste of time and emotional energy. Seven times out of ten it will go up and about three in ten it will go down. Ahead of time we don’t know which it will be, but the odds are in our favour.
- Shares are volatile. In any given year they can and do go up or down by quite a lot. If we want to enjoy the long-term wealth creation that the stock market has provided, we just have to live with the uncertainty. Volatility, however, is not the same as risk.
- If you start investing at the age of 20 (and history is any guide) you may experience three horrible years before you turn 70 in which the value of your portfolio falls by more than 20%. More than 90% of the time you will not suffer in this way; in around one year in four you will feel as you do today - quite happy.
- The time to recover your money after big falls can be surprisingly short. On the three occasions that shares have fallen by more than 20% since 1969 the recoveries were 24 months (2002), 25 months (1974) and 70 months (2008). The big falls are actually not the ones to worry about because the market tends to bounce back quickly from these kinds of panicky episodes.
- The difference in total return between the investor who takes and spends their dividends and the one who re-invests the income is very significant. Live on your salary while you still have one and let your investments benefit from the magic of compounding.
- In an ideal world, it really does make sense to avoid the bad years. The MSCI All World index fell by more than 40% in 2008. Unfortunately, we don’t live in an ideal world; fortunately, we don’t need to.
Will the stock market rise or fall in 2020? I don’t know. Am I happy to be invested despite not knowing? You bet I am.
Happy New Year.
Five year performance
|(%) As at 31 Dec||2014-2015||2015-2016||2016-2017||2017-2018||2018-2019|
|MSCI World Index||-2.7||5.3||20.1||-10.4||25.2|
Past performance is not a reliable indicator of future returns
Source: Thomson Reuters Eikon, as at 01.01.20, price index in USD terms
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Please be aware that past performance is not a reliable guide indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.