As Phase 1 of Ireland’s Roadmap for Recovery kicked in this week, we see various sectors of society slowly make a return to somewhat of a new normality. These range from construction workers, garden centres, building suppliers as well as some stores that are providing essential services. We have also seen an expansion whereby there are more Public amenities reopening and people can gather in smaller groups all the while adhering to the policy of Social Distancing, a term that 3 months ago was alien to most of us.
This Covid-19 Pandemic has certainly affected us all in some way or another, be it financial, work, health or in some cases mental health. It got us thinking, what other similar events have occurred in the last number of decades and did we learn anything from these that can help us at this time when it comes to our investments?
Since 1980 there have been 12 major Epidemics in the world that have affected stock market performance (figure 1). In this case we are looking at the S&P500 (ref. First Trust Global Portfolios) where the old adage goes that ‘a picture tells a thousand stories’. If we think back on these events (some which may have occurred before some of our readers were even born), they all made headline news. At the time these events unfolded, it was widely reported that each one was going to have a catastrophic effect on the economy and have a major impact on people’s future lives. Yet in real terms, only one of these events had a negative affect on the price of the S&P index, HIV/AIDS (Epidemics and Stockmarket Performance since 1980 – Ref. First Trust)
Whilst in the eye of the storm now with the Covid 19 pandemic, all the financial, social media outlets, hourly news bulletins and numerous other information channels highlight the downward spiralling markets and the volatility and fluctuations as a result. This in turn creates huge bouts of fear and anxiety that can have a major impact on peoples well-being. So, let us take a look at some real figures and what we have learnt from past events and how these blueprints may help us manage our outlook during these times
What if we told you, there have been approximately 63 crises events since 2008, how many of you reading this article would remember 5 or even 10 of these? Truth be told, we only managed to get about 12 of these after racking our brains when we tried. All of these events had a negative effect on the markets and yet if you had invested $10,000 in the S&P 500 in 2008, it would have grown to $28,417 over that 12-year period (Crisis and Events S&P 500 Index 1 January 2008 to 31 December 2019 – Ref. First Trust)
Maybe one of the reasons we do not remember these events as clearly as we should is down to the manner in which they are presented. When there is bad news to report about the stock market, it’s very often reflected as a percentage loss and when the market is on the rise, it very often gets reported by way of an increase in points which for most people is like talking double dutch. We have conducted a number of informal polls amongst some clients and friends and when we ask the question, “what does a rise in points in the stock market mean”, we normally get a blank stare, followed by, can you tell us what was the percentage gain? Which begs the question, why report the markets in this manner, is it to confuse us?
Some of you may be familiar with the term ‘staying in your seat’ when it comes to investing money. This has never been truer than what we have been through these past 12 weeks and what may lie ahead in the coming months. Recently, we were on a zoom video call with a family member who lives in the UK where she has been retired for some time. She has a very good adviser who has been looking after her financial affairs for many years and who we know as being excellent at what they do. Notwithstanding the excellent relationship she has with her UK advisor, from time to time she will call up and ask what we think about the portfolios in which she is invested. The first question we always ask her is why? Why, as in has the investment changed, has the underlying investment philosophy changed? We always get the same answer, No!
So, have the funds you are invested in changed? Ah, no is the reply. Are you still getting the same level of income from your investments? Yes. So just to clarify, everything is as it has been for the last 13 years, with a few small tweaks along the way, your money is still there, its giving you the income you desire and you are getting good value? Yes, she says. All our family member really wants is to go through this well-worn script with us again, maybe for the reassurance. She understands her money in this way, its like cooking, if you follow the recipe of a well known and respected chef, 9 times out of 10 you will get a plate of very good food. You are using the chef’s years of skill, experience and knowledge and replicating it at home. In the same way there are some exceptional Investment Managers out there, who through years of rigorous academic research and expert implementation know what works, part of our work is to find the best at what they do and follow their recipe.
So why then when it comes to investing, do we always look for the next big thing, the hot stock, etc.? Why do we listen to pub talk or the anecdotal stories of a friend who knows someone who made a fortune in the markets? Why do we not look back and use history to our advantage and maybe not make the same mistakes repeatedly?
Written by Simon Thompson CFP®
and Life and Money Ireland
This information is for general purposes only. This information is not intended to be a substitute for specific professional financial or tax advice, as individual circumstances vary. Please see a financial professional in regards to your own individual situation.