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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 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 change your investment during a correction, you risk turning a potential loss into a real one and you may miss out on any subsequent market rebounds.

1). Stock markets go up over the longer 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 42 years out of the past 52 years; that’s 80 percent of the time.

Source: Lipper 14 March 2022. Based on the performance of the S&P 500 Total Return Index. The S&P 500 index measures the performance of the top 500 companies by stock market capitalisation in the United States.

  Warning: Past performance is not a reliable guide to future performance.

Despite strong market gains over the long-term there have been numerous large peak-to-trough falls in the S&P 500 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.

2). Stock market falls are inevitable

Source: Lipper, as at 14 March 2022. S&P 500 total return in USD.

  Warning: Past performance is not a reliable guide to future performance.

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: Lipper, as at 14 March 2022.. S&P 500 total return in USD

 Warning: Past performance is not a reliable guide to future performance.

“The stock market is a device for transferring money from the impatient to the patient”

Warren Buffett

The key message from these three points is that being patient and remaining invested can result in good outcomes. Even if you time things right and get money out as markets are still falling, you need to again time things well to get back in for the market bounce. In fact, by missing out on a very small number of days with strong returns an investor can ruin their longer-term returns. Right now, we recommend that clients speak with their Financial Broker about the options of sticking with their financial plan and staying invested in a fund that matches their attitude to risk and return. The below chart helps illustrate the power of remaining investing and the impact of missing out on those strong days:

Source: Lipper, a Thomson Reuters company, data from 31 December 1999 to 14 March 2022 Returns are in USD terms.

 Warning: Past performance is not a reliable guide to future performance.

These three simple messages are well-understood by investors when things are going well but often get forgotten or questioned in times of stress. If you are looking for more information please contact Frank Ryan Financial Services

Source; Aviva Investors