We are living in a time of extreme uncertainty and the anxiety that comes along with it. Against the backdrop of war, humanitarian crisis, and economic hardship, it’s natural to wonder what effect these world events will have on our long-term investment performance.
While these challenges certainly warrant our attention and deep concern, they don’t have to be a reason to panic about markets when you’re focused on long-term investing.
Imagine it’s 25 years ago, 1997:
- J.K. Rowling just published the first Harry Potter book.
- General Motors is releasing the EV1, an electric car with a range of 60 miles.
- The internet is in its infancy, Y2K looms, and everyone is worried about the Russian financial crisis.
A stranger offers to tell you what’s going to happen over the next 25 years. Here’s the big question: Would you invest in the stock market knowing the following events were going to happen? And could you stay invested?
- Asian contagion
- Russian default
- Tech collapse
- Stocks’ “lost decade”
- Great Recession
- Global pandemic
- Second Russian default
With everything I just mentioned, what would you have done? Gotten into the market? Gotten out? Increased your equity holdings? Decreased them?
Well, let’s look at what happened.
From January 1997 to December 2022, the US stock market returned, on average, 8.53% a year and the Australian stock market returned on average 8.57%.
These returns are very much in line with what returns have been over the history of the stock market. How can that be? The market is doing its job. It’s science.
Investing in markets is uncertain. That uncertainty never goes away; however, it is the role of markets to price in that uncertainty. There were a lot of negative surprises over the past 26 years, but there were a lot of positive ones as well. The net result was a stock market return that seems very reasonable, even generous. It’s because of uncertainty that we have a positive premium when investing in stocks vs. relatively riskless assets. It’s a tribute to human ingenuity that when negative forces pop up, people and companies respond and mobilise to get things back on track.
By investing in a market portfolio, you’re not trying to figure out which stocks are going to thrive, and which aren’t going to be able to recover. You’re betting on human ingenuity to solve problems. The key to an investor receiving the above returns would have been two-fold. Firstly, investing in a broadly diversified manner capturing the full market return and secondly, staying invested for the whole period regardless of what was happening in the market, the economy, or the world.
I would never try to predict what might happen in the next 25 years, but I do believe the best investment strategy going forward is to keep in mind the lesson learned from that stranger back in 1997: Don’t panic. Invest for the long-term.
Stephen Lowry (CFP® Professional, DFP, AIF®) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.