Jonathan Young: Coronavirus - why you shouldn’t run from negative returns
Jonathan Young, a member of Johnston Carmichael’s financial planner support team, discusses why investors shouldn’t run from negative returns during the coronavirus outbreak.
Whilst the impact of the coronavirus crisis (COVID-19) is still being measured around the world, and in some ways is immeasurable, the financial cost is somewhat easier to gauge.
On Monday 9 March, the combination of the global instability caused by COVID-19 and the failure of Russia and OPEC to agree an appropriate cut in the production of petroleum - to reflect the reduced demand - caused stock markets around the world to plunge.
The FTSE 100 dropped 7.7% and many more markets around the world plummeted in what is being dubbed Black Monday 2020. This single day drop came swiftly on the back of the earlier ‘crash’ on 27 February 2020 and preceded the Black Thursday crash which saw even greater losses - when the FTSE 100 suffered the greatest single-day percentage fall since the 1987 Stock Market Crash.
Whilst globally there may be greater concerns than the financial loss, for those affected and those who may be reliant on their investments (such as pensioners) this is undoubtedly concerning. However, as Black Monday 2020 took its name from the 1987 crash, we can take some valuable lessons from that crash as well.
On Monday 19 October 1987 the FTSE 100 fell by 23% (technically over two days, due to the market being closed by the stormfront battering Britain at that point). Both two major American stock markets also dropped in excess of 18% on the same day, resulting in the largest single day downturn in both markets.
Despite posting the highest single downturn in one day, 1987 actually finished the year with the UK stock market posting a positive return for the calendar year; albeit a 0.1% positive return, but it wasn’t the worst year the UK stock market has seen.
The largest drop in the UK equity market over a calendar year occurred in 1974 where the market fell by -50.4% between January and December. That would have been an extremely uncomfortable time to be invested in the UK, the pain of seeing over half of your invested money disappear is hard to imagine and for all of those that left the UK Market at the end of 1974, they acted in a completely understandable fashion.
So, what was the best year ever recorded for the UK Market? 1975 - when the market recorded an overall return of 145.2%. This pattern is not a one-off either:
Whilst this should not be taken as a prediction that the stock market is going to recover imminently or that 2021 will offer record returns, it illustrates that these tough market conditions tend to be short lived.
How short lived? 1.3 years on average.
This is the average life of a Bear market (where there is a price decrease in the stock market by more than 20%) since 1900. Compare this with the average lifespan of a Bull market (price increase of more than 20%) of 7.9 years since 1900.
When you consider that most investment strategies with a high exposure to equities are long-term in nature (10 years+) then a downturn of 1.3 years during that period should not impact on the long-term success in meeting your objectives.
So, although the past few months have been unprecedented in the scale at which coronavirus has affected all of our lives, for those concerned about the effect it has had on their investments, history has shown us that if you react to short-term negative returns, you will inevitably be missing out on the positive years that follow over the longer term.
Please note: This communication should not be read as a financial advice. While all possible care is taken in the completion of this blog, no responsibility for loss occasioned by any person acting or refraining from action as a result of the information contained herein can be accepted by the firm.
- Read all of our articles relating to COVID-19 here.