In defence of the stock market
Written by Trevor Keidan on June 06, 2019.
Of course you can lose money on the stock market and people do so every day. And some days the losses are big. The media gets very noisy when the markets crash. Think of the furor when the global financial crisis hit in 2007/2008 but also more recently when Chinese stocks went into freefall in 2018, sending shockwaves around the globe, and even towards the end of last year when stocks fell around 20% in just three months between September and December signaling an official bear market.
The fear of losing their hard-earned money in the wake of such events is one reason why many people steer clear of investing in stocks and shares. But those same people may be missing out. If you’re saving for retirement, you have to put your savings somewhere and that somewhere must at the very least be keeping pace with inflation and preferably generate wealth. That leaves you with limited options.
And that’s why I’m going to fight the stock market’s corner! Although the media would often have you believe otherwise, the markets have performed consistently since they began. The key is in the time horizon. While buying and selling stocks over the short term could leave your savings vulnerable to the inevitable peaks and troughs of the market, in the longer term you are far less likely to lose out.
Let’s take a look at the figures. This table shows the performance of the U.S. market over different rolling time horizons using annualised returns from 1872 to 2018 (based on the performance of the S&P Composite Index pre-1957 and the S&P 500 Index since 1957).
Over the course of one year, it is clear from the red lines that there is quite a high chance of losing money – around 31% in fact (although green still outnumbers red). And in years where losses occur, they can be pretty high. This is indicated by the length of the red lines - the longest line corresponds with the financial crisis of the late noughties.
On the flip side, look at how the red diminishes the longer you stay invested. By the time you have been invested for 20 years, negative returns are eliminated altogether. Hence the title of this post.
This is why for the average investor, timeframe matters hugely, and why we at Infinity are advocates of the buy-and-hold approach for the vast majority of our clients. We’re not the only ones. Warren Buffet has famously said ‘Don’t buy anything you wouldn’t be willing to hold for five years.’ and the strategy seems to have worked for him!
The opposite of buy-and-hold is timing the markets and it is when adopting the latter approach that investors tend to put their savings at risk. Timing the markets – which in reality you need to do twice, both when you buy and when you sell – is extremely difficult even for professionals who spend all their time concentrating on what the markets are doing and indefatigably researching companies and shares.
Really, why would you take the risk, especially if you don’t need to? If you have a well thought-out financial plan with concrete financial goals and you save regularly and over a sufficiently long timeframe, it just isn’t necessary to take such a stressful and precarious approach to saving.
If you’d like to take the trauma out of financial planning, Infinity’s professional financial advisers are here to help. We can look closely at your current situation, drill down into your long term goals and work out your path to achieving them with the least amount of risk necessary. In close partnership with leading investment manager, Tilney, we will guide you in choosing the investment strategy which works for you and help you select from a range of diversified investment products to suit all levels of risk so that you can harness the power of the stock market and make it work for you. Drop us a line at firstname.lastname@example.org to find out more.