It is tempting to believe an investor’s long-term outcome depends on how many successful companies they can invest in.
While this metric will certainly have some bearing on their returns, I believe the key metric that determines success is how many temporary declines – or bear markets – they can endure with patience and discipline.
Often characterised by worsening economic fundamentals and widespread panic, these periods test the resolve of even the most experienced investors.
At the height of the decline, with negativity all around them, every investor is forced to grapple with the big question: “We’ve recovered before but is it different this time?”
With the 2022-2024 bear market now consigned to history, it’s time to celebrate the clients who displayed discipline and patience
Inevitably, as we’ve learned from history, the storms pass and concerns are resolved. Ultimately, investors who remain optimistic about the market and humanity’s long-term prospects are rewarded with returns most will never achieve.
A dark time
With global markets recently reaching new all-time highs, I want to reflect on the last two years and reinforce the enduring benefits of patience and discipline.
On 3 January 2022, almost two years after the first Covid-related market decline, the S&P 500 reached an all-time high. Then, precipitated by ongoing global inflation and a rising interest-rate cycle, markets started to decline, officially becoming a bear market (a decline of 20% from the previous high) in June 2022.
We’ve recovered before, but is it different this time?
Four months later, in October, the value of the world’s biggest publicly traded companies had been marked down by 25% since the start of that year.
To remind you, at that time, the Russian invasion of Ukraine gripped the world, Liz Truss was the UK prime minister and global inflation was near its peak. ChatGPT had not even been released yet.
There was a lot to be worried about and many feared further market declines were likely. In short, it was not easy to be an optimistic investor.
Rational temptations
While the future will always be uncertain, times of heightened financial distress will always force investors to question their faith in it. Under these conditions, it’s tempting to make changes that would not seem reasonable under more stable conditions.
If some of your clients made decisions they now regret, what could you have done better?
After months of distress, many investors capitulated to the prevailing negative sentiment, switching out of long-term investments to minimise further losses. With cash returns at levels not seen in over a decade, we are sympathetic to investors who made these changes out of uncertainty fatigue.
However, I strongly believe the economy cannot be forecasted and markets cannot be timed. Any decision that relies on one of the above is pure speculation and not worthy of inclusion in any financial plan.
A time to celebrate
We now know that this decline, like others before it, was temporary.
After almost 300 days of gradual losses, the market started its slow climb to recovery. In January 2024, more than 450 days since the dark days of October 2022, the market had advanced by more than 38%, completely erasing the mentioned declines.
Rather than fearing the next 20% decline, we want clients to be fearful of missing the next 100% advance
With the 2022-2024 bear market now consigned to history, it’s time to celebrate the clients who displayed discipline and patience. If some of your clients made decisions they now regret, what could you have done better? Take comfort from the fact any lessons you learned can be applied when the next decline arrives.
When will the next fall come? I don’t know and neither does anyone else. However, rather than fearing the next 20% decline, we want clients to be fearful of missing the next 100% advance. Both events will surely happen; we just don’t know when.
Your work to ensure clients stick to their long-term plans is valuable and noble. Yes, we need to be prepared for the next crisis that will challenge their resolve but, first, let’s celebrate another triumph for the optimists.
Andy Hart is founder of Humans Under Management
Great article and so true