The invasion of Ukraine by Russia has added a humanitarian tragedy and a significant uncertainty into the world economy. The macroeconomic outlook of rising inflation leading to tightening monetary policy was already providing a strong headwind to global growth shares, as well as government and corporate debt. A noticeable period of volatility is being experienced and may continue, particularly in the absence of a de-escalation of the invasion. We appreciate how unsettling these periods are for investors, particularly as it is only two years since the significant shock at the start of the pandemic.
It is easy to be fearful and to make the decision to sell. However, whilst the past might not be a reliable guide to the future, history tells us that time in the market is the investor’s friend in these circumstances:
Fidelity International published data on returns from the FTSE All Share for five years to the end of September 2021. The effect of missing out on the best days in the market cuts returns from 6.2% per annum to 2% per annum. Missing the best thirty days makes returns negative at -2.7%.
In addition, many of the best days follow some of the worst days. In the twenty years to the end of December 2021, half of the best days on the US S&P 500 index have occurred during a bear market (when the market has declined by 20% or more) and a further one third took place during the first two months of a bull market, before it was clear a bull market has begun.
We have examined geopolitical events of the last eighty years and the US S&P 500 reaction:
- The biggest reaction was the bombing of Pearl Harbour in 1941. It resulted in a total decline of 19.8% and it took 307 days for recovery.
- Iraq’s invasion of Kuwait in 1990 resulted in a total decline of 16.9% and took 189 days for recovery.
- North Korea’s invasion of South Korea in 1950 resulted in a total decline of 12.9% and took 82 days to recover.
- The 11 September 2001 attacks caused an 11.6% decline and took a month to recover.
This data supports our view that time in the market, rather than timing the market remains the key to successful financial planning, no matter the short-term worries it can cause. Nobel Laureate William Sharpe found that ‘market timers’ must be right 82% of the time to match the return realised by investors who stay the course.
However, some investors may need to consider their plans:
- Short-term investors such as those approaching taking benefits from pensions, or have a known or emerging need to take capital out of their portfolio, need to make contact.
- Sharp market movements can be problematic for those taking fixed regular withdrawals.
- Although cash interest rates remain low, and a buffer of six to twelve months outgoings is encouraged, inflation will reduce the purchasing power of deposits.
- If you feel that your risk tolerance might have changed, please ask for a fresh risk profile questionnaire.
Finally, with just twenty one working days until the tax-year end at the time of writing, the present uncertainty should not delay the use of allowances to continue your financial planning.
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