Markets can make fools of us all……IF we panic.
So don’t!
Since the stock market has started to “correct” – ie, fall greater than 10% from a previous high, many of us are asking the question, “should I buy?” or “should I sell?”
There’s an old saying, that “the share market goes up by the stairs and down by the elevator.”
While bear markets will always test an investor’s resolve, historical context can be helpful….
….So as you look nervously at the SELL button remember that saying and think about the following historical facts:
- Since the 17th century until today, there have been dozens of dips, bubbles, and asset price collapses. So don’t panic, they happen all the time….declines of 10% or more are a dime a dozen!
- Who doesn’t forget the global financial crisis (GFC), where the All Ord’s fell 55 per cent over an excruciating 14 months from its peak in November 2007 to its bottom in early March of 2009.
All up, if you use the rule of thumb that a bear market is a fall of at least 20 per cent, over the past 60 years Australian shares have experienced eight of them, including the current one.
The average time it took to recover the losses was 53 months, though it’s varied between 15 in the mid-1990s to more than 10 years after the GFC (the length of the recovery period is highly influenced by how overvalued the market was going into the sell-off).
The average return over each recovery period was better than 10 per cent a year, or almost 13 per cent if you exclude the GFC as an outlier.
Again, for some context, in the US there have been 12 bear markets since 1965 with an average fall of 31 per cent, and an average recovery period of 21 months (less than half of Australia’s).
That means once the bear market is finished, the average returns over the recovery period have been more than 23 per cent a year.
When will the elevator stop?
The question everyone’s asking is when the current correction will stop. The honest answer – but entirely frustrating – is nobody knows.
Constant growth was never going to last and there’s no reason to change a sound investment strategy based on a chance encounter with a bear!
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