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Investing – patience pays

When it comes to investing – patience pays

Investing in stock markets is designed to deliver returns over the medium to long-term. In uncertain environments like Covid-19 some investors get nervous, losing sight of their investment objectives. Many are tempted to postpone new investments, and even to sell their current holdings with the aim of reinvesting when the stock market rebounds. However, if you do sell your investments during a correction, you risk turning a potential loss into a real one and you may miss out on any subsequent market rebounds.

During these unnerving times, it’s important to focus on your long-term goals and remember these three important things about investing:
1 Stock markets go up over the long term.
2 Large peak-to-trough falls in value in stock markets are inevitable.
3 Historically, the biggest gains tend to follow the biggest falls.

The challenge is we don’t know when point 2 ends and point 3 begins but we do know that over time you may benefit from simply being patient and remaining invested. We always recommend that you speak with your Financial Broker about the options of sticking with your financial plan and staying invested in a fund that matches your attitude to risk and return.

 

1. Historically, stock markets have gone up over the long-term

Despite recessions, periods of stock market volatility, and wars, the US equity market, as represented by the S&P 500 total return index, has delivered a positive return in US dollar terms in 40 years out of the past 50 years; that’s 80 percent of the time.

 

2. Stock market falls are inevitable

Despite strong market gains over the long-term there have been numerous large peak-to-trough falls in the S&P500 total return index. If we roll the clock back to the 1950’s we see that big peak-to-trough falls in markets happen perhaps more regularly than we might think. “Bear markets” are broadly defined as peak-to-trough falls of 20% or more.  In the below study, we look at the US Stock market, as represented by the S&P 500 total return index and include all falls of 19% or more in US dollar terms. This chart shows that falls of this magnitude occur roughly once every 5 years, average a dip of 30%, and the average peak-to-trough period is typically 1 year.

Source: Bloomberg, as at 31 December 2019. S&P 500 total return in USD

3. The biggest gains follow the biggest falls 

History shows us that markets generally bounce back strongly from large setbacks. Taking the same periods above and looking at returns over the 12-months that followed the sharp falls we see how quickly things can change.

Source: Bloomberg, as at 31 December 2019. S&P 500 total return in USD

Market volatility is an inevitable part of investing. While current uncertainty can be unnerving, it’s important to remember that stock markets generally rise over the medium to long-term, so investors need to keep a short-term pullback in perspective.

Right now, we recommend that you speak a Financial Broker about the options of sticking with
your financial plan and staying invested in a fund that matches your attitude to risk and return.

Except where stated as otherwise, the source of all information is Aviva Investors as at 24/03/2020.

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