On 5 August this year, Japan’s major stock index, the Nikkei 225, suffered its worst day since the Black Monday crash of 1987. The index fell by 12%, with the sell-off triggered by fears of a recession in the US.
Seeing headlines like this – the FTSE 100, US S&P 500 and many other indices fell that day – can make you worried about your portfolio. The emotional reactions to losses can be strong and drive you to exit the market to avoid further potential falls in value.
However, on 6 August, the same Nikkei 225 index registered its highest-ever daily points rise. The Tokyo index closed up 10.3% – up 3,217 points to 34,675.
What these 48 hours illustrate is the wild volatility that can sometimes occur in global stock markets. On any given day markets can rise and fall – sometimes sharply – and it is why patience is such a virtue when it comes to investing. Read on to find out more.
Sharp market falls happen more often than you might think
At some time you will no doubt have seen sensational headlines about the “billions wiped off the value of stock markets”.
It might surprise you to learn that steep falls in markets happen more often than you might think. Indeed, research by Schroders shows that world stock markets (as represented by the MSCI World Index – an index of more than 1,400 large-cap stocks from 23 developed countries) fell by 10% in 30 of the 52 calendar years prior to 2024.
Source: Schroders
More substantial falls of 20% happened in 13 of these 52 years.
Despite these regular falls, the MSCI World Index has posted an annual gross return of 8.53% since 31 December 1987.
What this demonstrates is that falls in market values are not unusual. Despite this – and the headlines that come with them – markets have performed well over time (you never see headlines about the billions wiped onto stock markets!)
Loss aversion can lead to emotional decisions that can hinder your progress towards your goals
More than 30 years ago, Nobel prize-winning psychologist Daniel Kahneman and his compatriot Amos Tversky posited the “loss aversion” theory. The pair found that humans feel the pain of losses twice as strongly as the pleasure of gains.
Loss aversion can result in you wanting to avoid risk, leading to an overly risk-averse portfolio that may not deliver the returns you need to achieve your goals.
When markets fall, the fear of “losing” money can also push you to cash in investments simply to avoid further losses. This could mean you miss out on potential gains if the stocks you have sold rebound in value.
The Nikkei 225 index in August is a good example of this. If you had exited the market after the big fall on 5 August, you’d have missed the subsequent rebound in share prices the following day.
Patience and staying invested can be good for your wealth in the long term
If loss aversion or other fears prompt you to sell your investments and move to cash, it can also hinder your progress towards your long-term goals.
Schroders cites some examples of this in action.
If you had sold your shares and moved to cash in 1929, after the first 25% fall of the Great Depression, you would have had to wait until 1963 – 34 years later – to get back to breakeven.
Had you stayed invested, you’d have broken even in 1945 – a whole 18 years sooner.
Shifting to cash might have avoided the worst of your losses during the crash but was still by far the worst long-term strategy.
The table below illustrates some further examples of the number of years it would have taken you to recoup losses after a 25% market fall had you a) remained invested and b) sold and moved to cash.
Source: Schroders
What this demonstrates is clear: Remaining patient and staying invested – rather than selling and moving to cash in response to a big market fall – would have been bad for your wealth in the long term.
Get in touch
If you’re worried about uncertain markets, we can give you the reassurance you need and create a portfolio aligned with your long-term goals.
To find out more, please get in touch. Email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
