Worried about a stock-market crash? Here’s what you have to keep in mind
With the most recent stock market volatility spiking and the media headlines being dominated by the most recent turbulent downward trends in world equity markets, it helps to remind oneself that following a disciplined academic investment approach has always rewarded long-term investors since 1926.
Readers of this blog will probably remember our article dated 3 October 2017, where we had already taken the reader through the Lessons for the next market crisis. It will certainly help to re-read that very article and take the lessons to heart.
In addition, the reader should keep the following points in mind when markets go through gyrations, as it just happens at this very moment:
Since 1926, equity markets have indeed averaged a -14% annual decline in the rare event of a losing year for stocks. While each generation of investors thinks that they are the worst hit by equity volatility, the reality of the matter is that such equity draw-downs are very, very common. It just so happens that we have gotten used to extremely benign markets over the past 18 months.
Daily equity market dips of more than -2% occur more than 5 times a year on average since 1926.
Markets decline by 30% or more every 5 years, on average. There is no discernible pattern to predict such declines, but markets have always recovered again.
Equity markets rise 3 out of 4 years, going back to 1926. The probability of an annual equity market gain is hence about 75%. These are phenomenal odds, even casino operators don’t enjoy such favourable odds.
Over long periods, equity markets significantly beat inflation
The most important behavioural guidelines an investor should adhere to in turbulent market times are:
Turn off your TV and don’t check your account during equity market draw-downs. This is by far the hardest part of the equation.
Having an investment strategy based on academic insights and a portfolio structure within your risk profile is the best antidote against panicky knee-jerk reactions.
NEVER MAKE IMPORTANT DECISIONS BASED ON EMOTIONS.