The stock market is not a straightforward and simple place to operate in – it takes knowledge, experience and, lastly and very importantly, patience. This is certainly applicable during these challenging times, when worldwide stock markets are bearing the brunt of the coronavirus outbreak and are going through a period of intense volatility.
Keeping calm is easy to say in times like these, but if one had to look at historical reviews of past epidemics from 1981 (when HIV and AIDS topped the epidemics list) to date, it is evident that the major US indices kept up the momentum in the longer-term.
One glance at the adjacent chart is sufficient to realise that even over a 12-year span, the stock market performance was a positive one. This time span includes epidemics like the H1N1 (swine flu) in 2009, cholera in 2010, Ebola in 2014 and Zika in 2016, among other epidemics.
An observation of a six-month change of the S&P 500 Index following the start of an epidemic was positive in 11 of the 12 cases, with an average price return of 8.8 per cent, while a 12-month change of this same index was positive in nine of the 11* cases, with an average price return of 13.6 per cent.
While it may feel and seem to be a bumpy ride at the moment, the longer-term investor rides the market bumps and evens out the ride. If you think about it, jumping the ship during such difficult times can potentially lose you money which financial figures could well stabilise when the markets recover.
Yes, the global economy has taken a rather significant hit. The decline in economic activity is momentous and possibly one of the worst hits for some companies in their lifetime.
Statistically-speaking, and once again taking the long-term perspective, one can see that the markets recouped, very often in a matter of months.
Often, the wisest option is to wait it out
Longer-term investments also accumulate in terms of compounding returns. The longer the investment period, the longer the money has time to grow. Think of a snowball effect – when a snowball rolls down a snow slope, it starts small and grows steadily in size as it rolls down.
Let’s face it – the hardest thing to make investors understand is to tell them to wait it out; however it is the easiest thing to. It removes emotions from the equation.
Taking the longer-term perspective and focusing on long-term goals are likely to keep you away from making rapid and often irrational financial decisions.
While the past is not a guarantee for the future, statistics are proving the argument; potentially, investments have proven to be a far better means for investing in the longer term over traditional bank accounts.
Acting in a frenzy is rarely wise and trying to make decisions in an emotional environment can be costly.
Unknown circumstances and turbulent times create volatility in the stock markets. These are the times we are facing now. Often, the wisest option is to wait it out. No one knows the future, whichever position you hold, be it in a business world or a government position.
Panicking when the going gets tough and when seas are rough will not get you to your destination. Pause and reflect – panicking can only make things worse.
Above are some epidemic and market analysis from First Trust to back up the case for having a long-term investing premise.
*12-month data is not available for the June 2019 measles.
This article is not, and nothing in it should be construed as an offer, invitation or recommendation in respect of investment products or services offered by the BOV Group. Any views, assumptions or opinions expressed in this article are those of the author. Value of investments may go down as well as up and may be affected by changes in currency exchange rates. Past performance is not a guide to future performance.
Stephanie Agius, Bank of Valletta Wealth Management