Michael Keaveney: With the ongoing downturn this year in global equity and fixed income markets, it is time, once again, to remind ourselves that volatility is an element of long-term investing. In this illustration, we count the number of 10% drops in the S&P 500 over the course of each year since 1980.

While the number of pullbacks may vary each year, markets don’t go very long without temporarily reversing course. We are not yet in 2022, and a large number of such sensors are already emerging. Even worse, this year equity market falls have been paired with a sharp downturn in the bond market, adding to investor anxiety.

Using the US bellwether markets to illustrate again, this time focusing on annual total return, we can see that calendar year equity returns, shown in blue, are occasionally negative. Turns in the bond market shown in red can also be negative, but not often. Rarely do these markets manage to turn negative at the same time, which we are currently experiencing, and this could trigger panic. In volatile times, it is understandable that investors may reconsider whether they want to continue to put their assets at risk, but we believe that decisions made in the future have a potential cost long term.

Investors’ resolve has been tested many times throughout history. For example, at the low point of the Global Financial Crisis in about March 2009, investors in the US equity market may have chosen to make the difficult decision to stay invested, and their future path may look good. the blue line. In contrast, it is easy to imagine an equity investor at the same time making a permanent decision to withdraw from their investments and remain in the safety of cash. This is indicated by the flat line at the bottom of the page.

But there is also a very interesting case for a reasonable decision like going cash for a year and waiting out the bad news and doom and gloom, and then reinvesting when times are deemed better. better. Of course, times that are supposed to be better are likely to change after the markets recover. At the depth of the Global Financial Crisis, this would have been shown by the red line, and the potential cost of that decision between the intervening years and the current times is shown by the gap between the blue line and the red line. That decision to sit out for a year and not effectively miss out on recovery after that had a profoundly negative impact on long-term success.

So let’s agree that while it’s understandable to think that something like the market is going down right now, I’ll go out and come back when things look better, for a long-term investor, the effects of acting on that thought look at. much like the red line. The missed opportunity to participate in the replay can have major consequences on ultimate wealth compared to a holding strategy.

For Morningstar Investment Management, I’m Michael Keaveney.



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