The overall return on a typical balanced portfolio over the last two years has been essentially flat despite significant swings in financial markets. Over this period markets have struggled with supply/demand imbalances, the war in Ukraine, double-digit inflation, aggressive interest-rate hikes and banking-sector instability to name just a few.
For those who have been invested for longer, annual returns of roughly 16%, 5%, and 11% over 2019, 2020, and 2021 on a balanced portfolio make the current market environment far more palatable however, investors’ patience can be tested during these periods. Now, more than ever, it is important to remember that investing is a long-distance race rather than a sprint and a certain level of endurance is required to see the benefits.
While stock market booms and busts can be painful, stagnant markets, like the last two years, can be just as trying from a psychological perspective. The longer this continues, the more temptation there is for some investors to sell their longer-term investments and opt for cash. This temptation grows stronger when, as now, interest rates on cash savings become more attractive. For our thoughts on switching cash, please read our previous article here.
Emotions can be an investor’s worst enemy. When the market is on an upswing, greed can cloud our judgment, tempting us to buy more in the hope that good times will continue. On the flip side, fear takes control during market downturns, compelling us to sell at the least opportune moments. However, it is not just extreme market conditions that challenge investors: flat markets have their own pitfalls, mainly in the form of recency bias. This cognitive trap leads us to assume that the current stagnant conditions will persist, tempting us to exit long-term investments and miss out on potential future gains.
The Cost of Cashing Out
Clearly, acting on emotions creates short-term relief, but the longer-term impacts can be incredibly detrimental. Consider the chart below. The coral line illustrates what would have happened to £10,000 invested in the S&P 500 (the 500 top companies in the US by market value) over the past 33 years. Now look at the blue lines, showing the outcomes for investors who panicked or lost conviction during major market events and moved to cash. The disparity between the two is a powerful reminder of the long-term cost of emotional decision-making in investing.
As we have often emphasised – it is time in the market, not timing the market, that really matters. Rather than being influenced by recent returns or potential risks on the horizon, a zoomed-out view shows that patience pays off. The key to long-term gains is to stay calm and maintain conviction.
Underlying Growth of Stock Markets
Though the long-term trend of stock markets is upward, we often lose sight of the reasons behind it. At its core, returns come from economic growth and the ability of companies to innovate and generate revenue. By investing, you secure a stake in a company’s future, gaining financially as it grows over time.
For instance, consider earnings per share (EPS), a measure of a company’s profitability. Back in 1990, the S&P 500 had an EPS of $22. It is now eight times higher at $176. Similarly, dividends per share grew from $11 to $68 in the same period.
While markets certainly experience highs and lows, these fluctuations only make up part of the story. As you can see, earnings and dividends increase over time and though growth is not a straight line, investors who are willing to stick it out can benefit hugely from taking part.
The Bottom Line
Long-term investing is hard and requires endurance. Maintaining conviction and staying invested during sideways markets requires just as much patience and fortitude as is needed during volatile periods. There will always be a reason not to invest or a risk on the horizon. However, owning shares in some of the greatest companies in the world allows investors to benefit from innovation and progress and has been, and is likely to continue to be, the best way to grow and preserve real wealth for generations to come.
Written by Artem Dubas & Jonty Brooks
General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.