At the time of writing (towards the end of May) financial markets are very volatile and the majority of global share indexes are sitting at their respective lows of the year. The S&P 500, for example (an index of the most important 500 US companies) is down by 20% since the start of the year. So, what is a person to do?
We will come back to this question. First of all, I would like to touch on portfolio construction, which plays a major part in long term performance.
The S&P 500 is just one index, therefore let me present you with a few other figures (all approximate):
- The Nasdaq, the index of US technology companies, is down 32%.
- Amazon is down 45%: Facebook is down 56%; Netflix is down 82%!
- The UK FTSE 100, again at the time of writing, is down just 5% from its February all-time high.
So now you may be thinking, the UK is the place to invest! Well, looking at the world’s leading stock market indexes, here are some longer terms numbers to consider. Since the dot com bubble highs in the year 2000:
- The UK FTSE 100 is up just 5%
- The German DAX 30 is up 72%
- The French CAC 40 is down 9%
- The Japanese Nikkei 225 is up 23%
- The United States S&P 500 is up by 160%
- Emerging markets (EEM) are up 305%
That is a lot of statistics – sorry about that! – but more importantly, what are the takeaways?
The number one takeaway is DIVERSIFICATION!
Investors should most certainly be considering these longer term time frames. What will happen in the next twenty years? Will Europe start to outperform, will emerging markets continue their assent? What about the US and Japan? These are questions nobody can possibly answer with certainty, and as we can see from the numbers above, the risks of betting big in one area and being wrong can be catastrophic to long term investors.
Thus, it is very important not to put all your eggs in one basket, be that a company, an index, or even a single country. Spreading risk globally, greatly reduces the risk of picking a dud(s). Today, very low-cost ways of doing just this exist.
The second takeaway is not to chase the latest fads. For example, the tech stocks mentioned earlier, exemplified by Netflix, were the darlings of the post-Covid market rally. The names mentioned above are well-established companies; some of their lesser-known rivals will never recover.
A global portfolio will normally avoid the worst of these types of re-pricing. So, coming back to our question at the beginning of the article; what is one to do when global markets are down approximately 20%, there is panic in the air and scaremongering in the media is in full swing.
A final thought to avoid making common investment mistakes
First and foremost, this is usually a very bad time to sell, at which point you would be locking in losses. Indeed, a certain Warren Buffet, one of the most successful investors in the world, would suggest quite the opposite; he once said, “be fearful when others are greedy and be greedy when others are fearful.”
Let us think about it another way. If you were going clothes shopping, you would not think, ‘oh, I’ll just wait until the sales are over’.
The point is; ‘time in’ the market is significantly more important than ‘timing’ the market, but all the better if you have an opportunity to do both!
This article was first published in the Connexion in Summer 2022