On 24th February 2022, Russia has launched a full-scale invasion of Ukraine, ending a 50-year period of peace in Europe. This is worrying for a multitude of reasons but we will address the worry of a negatively-affected stock market. This is what we have seen in the last few days.
Although the context is different from the onset of the pandemic in 2020, the Russian aggression towards Ukraine has similarly caused volatility in the market which we expect to continue over the next few weeks (although it doesn’t initially appear as though the market movements will be quite as drastic).
The volatility may be indeed shorter than a few weeks, it may be longer, but the lessons we have previously learnt from past market declines tell us the same story: These periods of volatility are temporary and holding is better than selling when it comes to achieving your long-term financial goals. As we have written before, attempting to time the market (that is to say, selling investments at a high point and re-purchasing the investments at a perceived low point) is a risky strategy and one which rarely comes to fruition. In fact, fleeing the market in times of a downturn could result in you missing out on some significant gains when the markets recover. This can have a considerable impact on your long-term performance as it is nigh-on impossible to time the moves in and out correctly.
What the past can teach us
An analysis by JP Morgan concluded that if you were not invested in the market for just 10 of the 7,301 days between 4th January 1999 and 31st December 2018, your annualised return would have been 2.01% per annum as opposed to 5.62%. To illustrate this even further, if you missed the best 60 days of market performance you would have realised a negative return of 7.40% on your investment! Strangely enough, whilst all the initial panic ensued the American markets climbed yesterday (24th February) with the NASDAQ index even posting a positive 3.34% return and today the UK and EU markets have followed suit, recovering somewhat. This all certainly supports the old adage of favouring ‘time in the market’ as opposed to trying to ‘time the market’.
Don’t be hasty!
At risk of sounding like a broken record from 2020 (or perhaps 2007 or 2000…), it is human nature to feel the urge to ‘do something’ when there is uncertainty. It’s only natural to try to take control. But we must resist that urge, remembering the reason why we are invested in the first place. We are not just invested to ‘make a quick buck’ – these are long term strategies, possibly for life. It also shouldn’t be forgotten that investment portfolios are structured in such a way that the assets are diversified, not just geographically but also into different industries and different assets classes (i.e. cash, equities, bonds), thereby cushioning the markets falls more than a concentrated portfolio.
As you may have gathered from what you have read so far, we are strong believers that the best thing to do is to do nothing – trust the markets, resist selling and focus on your long-term goals.
by Sam Brueton, Director of HCL Bank House Financial Services Ltd
Published on 25/02/2022
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This article should be read as a commentary rather than tailored financial advice. Individual circumstances apply.