You might consider the most important aspect of successful investing to be the stocks, funds, and other assets that you choose to invest in. Even though these certainly play a part, there is another element that might have an even more significant influence on your long-term returns.
This is your ability to persevere with your investments through market declines, or “bear markets”.
The definition of a bear market is when the stock market drops by more than 20% from the most recent market high. At times like this, even experienced investors can begin to feel nervous, as the drop is usually accompanied by economic difficulties and widespread concern.
While past performance is no guarantee of future returns, markets have historically always recovered from periods of decline. So, while some nervous investors may abandon ship during the volatility, those who hold their nerve and remain invested are well-placed to benefit from any eventual recovery.
Read on to learn why having optimism for the future, even when times are tough, could help you to achieve your long-term financial goals.
It was challenging to remain optimistic when markets fell during 2022
As 2024 begins, many markets are experiencing new highs, but the past couple of years haven’t been easy for investors.
Almost two years after the first Covid-related market decline, the S&P 500 index reached an all-time high on 3 January 2022. After this, though, global inflation soared which led many central banks to increase interest rates. In response, many markets began to fall.
In June 2022, the S&P 500 fell into a bear market. By October, global inflation reached its peak as the Russian invasion of Ukraine continued and Liz Truss became prime minister in the UK. At this point, some of the biggest publicly traded companies in the world had declined in value by 25% from the beginning of the year.
Optimism was in short supply, and many investors needed a lot of self-discipline and resolve to remain invested in their portfolio against this backdrop.
As cash interest rates rose, many investors moved money out of long-term investments to minimise further losses
When the stock market is going through a period of volatility, it’s difficult to feel confident that your investments could one day recover. This can create feelings of panic or distress, influencing your investment decisions and tempting you to make changes that you wouldn’t ordinarily consider.
As markets continued to fall through 2022 and 2023, many investors chose to move their money into what they deemed to be “safer” asset classes such as cash or bonds. This was partly because many cash savings accounts were offering much higher levels of interest than they had for over a decade.
It’s easy to see why this would be tempting as investments fell as cash savings offered a guaranteed interest rate, at least in the short term.
It's important to note that, although interest rates were high compared to the preceding decade, cash savings were still likely to lose value in real terms. This is because the rate of inflation around the world continued to outpace the interest rates available to savers.
As you’re no doubt aware, it’s impossible to know what might come next for the economy or the stock market. Those who move their money and attempt to time the market to avoid loss and maximise gains are purely speculating.
This is because the best days in the market tend to follow the worst. As Forbes reports, 70% of the best days for the S&P 500 occurred within two weeks of the index’s worst days. This makes it virtually impossible to miss the worst days on the market without also missing the best days.
Read more: 3 reassuring reasons to stay invested in the stock market during market volatility
Focus on the prospect of recovery rather than the fear of another bear market
Investors around the world have celebrated the recent news that stock markets are rising once again after several years of uncertainty.
The S&P 500 closed at a record high on 20 January 2024 according to a Reuters report, confirming that it has been in a bull market since October 2022. This could help to recoup many of the losses that you may have experienced at the peak of global inflation.
If you remained optimistic during those dark days, it’s time to celebrate your resolve and discipline. Even if you did make investment decisions that turned out to be unwise in the long term, remember that this can serve as a helpful lesson for the future.
No one knows when the market might once again experience volatility or uncertainty. Instead of fearing the next bear market, though, we recommend looking forward to the next bull market – when markets rise by 20% or more since the most recent nadir.
It’s similarly impossible to predict beforehand, but if you are invested in a balanced portfolio when it does happen, you could experience positive returns that help you to progress towards your long-term goals.
Get in touch
If you’re concerned about how recent market volatility might have affected your portfolio, we can help. Either contact your financial planner directly, email us at hello@ascentawealth.com or fill in our online contact form to organise a meeting and we’ll get in touch.
