Friend,
Even the most dedicated ostrich would have struggled to block out the tsunami of things happening under the new US administration. Amongst these is a series of seemingly random trade tariffs.
These, apparently, have spooked the US stock market, by which I mean the S&P500, the 500 largest Great Companies of the USA. Like all stock markets, the US one is made up of thousands of individuals making buying and selling decisions every second of every trading day, powered by computers with algorithms and data processing power beyond comprehension (well, beyond mine). As such we rarely know what is “spooking” the market en masse but we humans love labels and causes for things, and so “trade tariffs” is the malaise du jour.
On 19th February the S&P closed at 6,144. On the 13th March, nearly a month later, it had caroomed/crashed/imploded/[insert-overwrought-adjective-of-choice] to 5,522. A temporary decline from peak-to-trough of just a smidge over 10%.
Here, with insight from Mr Musk’s1 AI wizard Grok, are some of the resultant headlines in the Dying Legacy Media (DLM):
Experienced, respected commentators like John Stepek, a senior reporter at Bloomberg News, felt compelled to put out an “emergency podcast for those of you hyperventilating” (yes, really). With him on this was the also generally sound Merryn Somerset Webb.
This is such nonsense as to be almost funny. But it’s not: people like Mr Stepek and Ms Somerset Webb are respected influencers, and, for good or bad, contribute to the zeitgeist where money, people, and emotions collide.
A 10% Decline Is Chicken Feed
First things first: if a 10% temporary decline leads you to hyperventilate, you flat out cannot own a portfolio of The Great Companies of The World (GCOTW). Instead go sit in cash or “low-risk” alternatives and, over the decades, stare dribbling and open-mouthed but happy at the nominal value of your investments never falling, all as the real value (purchasing power) - the only thing that matters a damn - gets eaten alive by inflation.
Good luck with that, and enjoy your spot under the railway bridge later on in life.
If a 10% temporary decline leads you to hyperventilate, you flat out cannot own a portfolio of The Great Companies of The World (GCOTW).
Why is a 10% decline nothing but poultry food? According to the wonderful J.P. Morgan “Guide to the Markets”, since 1980 the S&P500 has experienced intra-year (calendar year) average peak-to-trough declines of just over 14%. Let me say that again: on average, over 45 years, the S&P500 has had calendar year declines at some point of over 14%.
This most recent wobble is significantly less than an average yearly peak-to-trough extending almost 50 years.
Despite this (because of this?), the S&P500 has delivered positive returns in 34 of those 45 years. Give yourself a moment to process these apparently two contradictory statistics.
As you do so, are you starting to see the link between market volatility and the long-term outperformance of great American companies? That, without the dips, you can’t have the soars and that, in the scheme of things, a temporary decline of 10% is absolutely nothing of significance.
A Bit of History
We are the product of our experiences. As a side note, people who say “lived experience” should be shot: what on earth is “unlived” experience? I digress.
I became an IFA in May 2001. Thanks to the unwinding of the tech stock boom of the late 1990s, world stock markets were already in turmoil before some fierce advocates of The Religion of Peace decided to fly commercial airliners full of human beings and aviation fuel into buildings.
That and the resultant War on Terror led to The Great Companies of The World (GCOTW) experiencing a 51% decline in value over nearly three, long, miserable years.
Try and imagine this as a three-part play. Somehow, you have £1,000,000 to invest in April 2000:
you invest your precious £1,000,000 pension pot/inheritance/business sale proceeds;
you hibernate for 31 months or so, emerging in early 2003 to get a valuation in the post (the Internet was not quite the thing it is today, more of which later);
having noted your pot is now sitting at £490,000 you promptly win Olympic Gold in “Hyperventilation For Beginners”.
These are real numbers and were experienced by real people. How would you react?
The only thing new in the world is the history you do not know.”
Harry S. Truman
Five years or so later, in October 2008, I set up my own financial advice business, right in the middle of what became known as The Great Financial Crisis (remember Northern Rock, Bradford & Bingley et al?) During this time the GCOTW managed a 59% fall in share prices.
59%! Permission to grasp at those paper bags granted without prejudice!
These back-to-back horrendous bear markets led to the so-called 2000-2010 “Lost Decade” for equity investors. We then had a very pleasant few years until the catastrophic reaction to The Wuhan Lab Leak in early 2020. Once again the prices of the GCOTW caroomed south, falling by 34% in just one month.
Three gut churning declines of 51%, 59% and 34% in twenty years. But please, do push out emergency podcasts when we just creep into a double-digit temporary decline of 10% or so.
What’s Changed Between 2000 And Now?
The reaction to recent market volatility strikes me as remarkable. And worrying. If otherwise sane, decent people are hyperventilating at 10%, what will they do at 34%? At 51%? At, God forbid, 59%?
Lincoln’s considered conclusion? Scoring very low in originality: social media (an umbrella term). And as social media pretty much gets the blame for everything these days, I’m quite happy to join the pile on.
In 2000, widespread broadband internet access was not a thing. You had to dial up via a modem (look it up, youngsters) and wait precious moments before logging in to your investment portfolio. It was a faff and you didn’t do it too often.
20-odd years ago, we didn’t have smartphones continually buzzing and vibrating with the latest Catastrophe of Catastrophes. We didn’t have our emotions constantly toyed with for clicks.
20 years ago we couldn’t, with just a swipe here and a Face ID there, log-in to our investment trading apps and make heat of the moment investment decisions that would have life changing consequences.
Now we can. And now we seem to panic at temporary declines well within the long-term yearly average.
What will happen when we have a serious decline? What will social media do then? How will you react?
Why Put Yourself Through This Misery?
Three significant declines of 51%, 59% and 34% in two decades. For the love of God, why would anyone do this?
Here’s why.
Despite (no, because of) these awful-but-temporary-declines the Great Companies of The World delivered an annual compounded return of 7.4% between January 2000 and the end of last year2. You get rewarded for suffering the volatility with life changing, permanent long-term outperformance.
Over that same period the real risk to your money, the silent wealth killer - UK inflation (RPI) - came in at 3.5% per annum. Capturing some or all of that margin of nearly 4% a year over 24 years is the difference between a dignified, independent retirement, where the money outlives you, and one where you outlive the money and have to go on bended knee to the children for financial assistance (the emotional equivalent of root canal surgery without anesthesia, of being trapped in a lift with Piers Morgan).
You can’t have the upside without the downside. One is permanent, the other is temporary. If you can master your emotions (“stop hyperventilating at the back”) and embrace the temporary but deeply unpleasant volatility then the permanent advance is yours.
If you can’t, stock up on those paper bags.
I am aware that the mere mention of Elon Musk is enough to drive some people batty. Get over it.
Dimensional Fund Advisors (sic). MSCI World Index, all dividends reinvested, returns in GBP.
Well said, Nick.
Our job - and our responsibility - to regularly remind clients (and anyone else who will listen) of how the dangers of not investing far outweigh the short term "excitement" we experience in the markets never ends...
Great article Nick. So I can stop hyperventilating - what would £1m invested in the GCOTW in 2001 be worth now if I’d not touched it.