The history of financial markets is littered with tales of fortunes made from the investment idea “done right at the right time”.
While the recent contraction in global stock markets may cloud this notion, the tech titans of the recent past have generally felt perfectly timed for the world’s transition to the 21st century digital technology revolution.
The same could be said of the great pioneers of the Industrial Revolution a few centuries ago, who saw select innovators and risk-takers do everything right as the world shifted from an agrarian and artisanal economy to one dominated by manufacturing.
From an investment perspective, the countries, companies and individuals that embraced and drove the innovations that made these revolutions possible arguably had perfect timing.
But the history of financial markets has also been littered with many entrepreneurs and investors whose timing was not so perfect. And many of their stories are not so glorious.
That’s the risk of relying on timing. And as modern investment strategies have demonstrated over the past 100 years, timing the ups and downs of financial markets in the pursuit of long-term prosperity can be a dangerous game.
Investors around the world have experienced a sustained period of volatility of late. For many, this has caused an understandably heightened sense of concern, not only about the short-term financial impact of this volatility on their portfolios, but also about what it might mean for the retirement that many are anticipating.
From a purely investment perspective, this can cause market volatility. For some it creates doubt, for others panic, and for almost all volatility creates fear.
When investors see their portfolios falling in value, their aversion to loss can compel them to sell in a falling market. And once they sell, many then stay out of the market, feeling burned from the experience.
But that very reaction can cost investors dearly, as those on the sidelines risk missing out on periods of meaningful price gains that can follow market downturns. Even missing a few trading days can take a toll.
It’s a useful reminder that time itself is essentially one of the best investment defenses for keeping the retirement picture intact.
In this sense, the old adage applies: time, not timing, is the key to long-term wealth accumulation.
Showing patience in the face of financial market volatility may be difficult, but it can be rewarding. Global equity markets in particular have a reassuring history of recovery. For example, after hitting lows in both August 1939 and September 1974, the Standard & Poor’s 500 Index rallied strongly, posting compound annual total returns of more than 15% over the next 10 consecutive 10-year periods in both cases.
Additionally, in the first year after the S&P 500’s five biggest declines since 1929, returns have ranged from 36.16% to 137.60% and averaged 70.95%.
And while recoveries can never be guaranteed, history shows that the benefits of staying invested over these periods have been significant.
Five Biggest Market Drops and Subsequent Five-Year Periods 1929-2021 (USD) – US Date Style
As a long-term investor, Capital Group believes that investment portfolios that have a proven track record of downside resilience and lower volatility can help protect and reassure investors. Calm analysis and long-term thinking can be an investor’s best friend in volatile times.
Riding the roller coaster that asset markets occasionally overthrow is not easy, and it is even more difficult when society at large and the global economy are challenged by unknowns such as a global pandemic and mounting geopolitical conflicts.
But to ensure that investors can stay on track for the retirement many of them have envisioned and been working toward, we think staying invested for the long term, through ups and downs, is crucial.
Matt Reynolds is an Investment Director at Capital Group (Australia).
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