It is a canard of investing wisdom that short term stock market gyrations should not really matter.
If you have invested for the long term in a way that suits your objectives and attitude to risk, just sit tight. But what is short term and long term?
Five years has always been the standard stipulation from financial experts as the minimum period that small investors should plan to remain in the market.
I’d argue our latest stock market crash confirms this advice is now past its sell-by date. It should be more like ten years.
Even the latest Covid crash is not a reason to fear the stock market – but it does means you have to be prepared to stay in the game for a long, long time.
Two graphs tell an interesting story about the history of the stock market.
From the conception of the FTSE 100 in 1984 to the end of 1999, the blue-chip index rose steadily and – largely – serenely. The Black Monday crash of 1987, despite four initial days of hair-raising losses, registers as only a blip on the graph.
It was scary at the time alright. I can remember my father slumped in his armchair, cursing under his breath as the Ceefax stock prices flipped over from one list of red to another and his portfolio of individual company shares nearly halved in value.
From its inception in 1984, the FTSE 100 index showed a remarkably reliable upward trajectory that – with a couple of scary blips – took it to record levels by the end of 1999.
But little more than two years later, the FTSE 100 had regained its losses. And by the close of the 1990s it was standing more than four times higher than its 1987 low, at nearly 7,000.
From then to now it’s a different story.
The dot-com crash – the only millennium bug that people hadn’t talked up – lasted more than three years and saw the FTSE 100 drop by nearly half. Then after a five-year recovery there came the financial crisis of 2008/09 with a similar reversal.
The recovery from that was tumultuous but the Footsie did spend most of 2017-2019 above 7,000. After a bounceback from the Covid crash, we are currently around the 5,700 mark.
From the start of 2000 to the present day, the blue-chip index has endured a series of major setbacks followed by equally remarkable recoveries.
Of course, we aren’t counting dividends here, which are a crucial addition to total returns, and we are just looking at sticking a lump sum into a FTSE 100 tracker – although increasingly that is the sort of thing people are doing.
Drip-feed investing, which is now popular with investors – particularly younger ones – who have spare cash each month, also smooths out volatility.
But crashes and corrections, big and small, just seem to keep coming. A lot of five-year periods that would have left you seriously out of pocket. Why?
Deregulation in banking and global financial markets. Ever more complex stock market-related instruments. Economic and commercial globalisation. Automated trading and algorithms. Difficulties in accurately valuing tech innovators and disruptors. Pandemics.
Our current correction by some measures has ceased to be a bear market – but we are not out of the woods by any stretch. The impact on the real economy, jobs, incomes and public finances is not yet clear and there could be some nasty shocks to come.
Experts have been encouraging investors to buy recently. And in many ways this a good time to start drip-feeding into an Isa – as long as you are in the game for a long time. If there are aftershocks in the coming year or so, you’ll be picking up cheap units.
But there are two interconnected lessons, I think, from the latest crash.
One, it’s an opportunity to revise your attitude to risk.
If your equity trackers have scared you, once share prices have recovered you could always switch some funds into more conservative, balanced – and perhaps managed – funds or investment trusts. (Some of the latter can also solve the dividends crisis.)
Two, plan to stay in the market for longer. For those with medium to high risk aversion and who don’t want to be constantly monitoring the markets and performance of their investments, it’s now 10 years minimum, not five.
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