Instead of doing your own analysis, you can invest in either a mutual fund or an ETF. Here, we look at the differences & similarities between the two.
There’s a lot to make investors nervous at the moment. Since the beginning of the year the global stock market has fallen nearly 20% and reached as low as -21.9% last week. Even the usually steady global bond market is 13.9% down year-to-date. Inflation and interest rates have been going up in leaps and bounds. The Ukraine conflict doesn’t appear close to a resolution. And just to rub salt in the wounds there’s now increasing talk of a possible recession.
Surely it would be foolish to invest now with all this going on? On the contrary, in this article we’ll explain why we think now’s actually the best time to invest.
Whenever there’s a big sale on at retailers, many people are eager to take advantage of the discounts on offer and bag themselves a bargain. With financial markets though, the opposite often happens. Global stock and bond markets are double-digit percentages lower than they were six months ago. Yet many are shunning them until “things have settled down”.
Markets don’t settle down though – they tend to ‘settle up’. Waiting for market volatility to pass means you could be effectively waiting until the discounts have all but disappeared. Markets may of course fall further than they already have, but let’s have a look at what’s happened in the past after the global stock market had fallen by around 20%.
This is the tenth time since 1970 that the global stock market has fallen by approximately 20% or more. That means on average these slumps have occurred roughly once every five years. Those who held their nerve and invested after the market had fallen by around 20%, however, would have been rewarded with an average 10-year return of 186.7%. Or put another way, on average you would have made not far off three times your money in the space of a decade.
These returns even account for markets continuing to fall after some of these 20%-or-so slumps. Following the 21.1% market decline between April 1973 and May 1974 for example, the market fell another 25.4%. Yet even with that subsequent drop it still returned 137.6% over 10 years. After an 18.6% fall between November 2007 and September 2008, the market then plunged another eyewatering 43.6%. Yet it still ended with a ten year gain of 99.2%.
So even when markets kept on falling, they always delivered a decent return in the end. Many times though, the global stock market began its recovery near the 20% drop mark. Don’t take that as a recovery forecast – it’s not. Instead see it as a reminder that if you’re tempted to ‘wait and see’ you could miss out on the recovery period, which is when the stock market has delivered some of its biggest gains.
Letting recovery periods pass you by is a sure way to put a dent in your long term investment returns. It could even be worse than getting caught up in market falls. This chart shows why. It plots 1000 weeks of global stock market returns against those same returns but without the ten best weeks, i.e. the top 1%.
The difference is there for all to see. If you remained invested for all 1000 weeks you would have earned a return of 360.2%. If you’d missed just those ten best weeks, however, you would have earned only 28% of that amount.
All but one of those best ten weeks came immediately after a period of falls. There’s no announcement they’re on their way though. It’s impossible to know exactly when each one will happen. Not even the most successful, seasoned professionals know. So if you’re thinking of waiting until things are looking up again, can you honestly say you’ll know the exact moment to invest so you don’t miss out on those top 1% weeks?
No-one knows for certain when the market is set to recover or if further falls are in store. What we do know though, is those who’ve delayed investing due to volatility have often ended up worse off than those who took the plunge and invested earlier.
Investing now means you’ll capture all of the market recovery from here on in, as well as of course any further falls, and you’ll benefit more from compound growth. If you wait for volatility to pass you could be waiting a while – markets can remain volatile for several years. You’ll avoid any further falls but you might also find out you’ve missed out on the best market returns.
It can certainly take courage to invest when things are looking turbulent, but that can turn out to be some of the best times to invest. We can’t control market histrionics but we can control how long we invest for. Fortunately for investors, the latter usually has a much bigger impact in the end.
Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.
To find out more about this topic and more, please fill in the form below to arrange a call back.
To access a full recording of the webinar, please fill in the form below. We'll email you a link to the video.
Stay up-to-date with financial news and insights delivered straight to your inbox. Sign up today.