This year the world celebrated – if that’s the right word – the 10th anniversary of the global financial crisis (GFC), when market bears roamed wild.
You can forget a lot in a decade, though, particularly as investment markets have been in an almost unending party mode since the immediate crisis was averted: the sky did not fall in, the GFC cloud moved on, the sun is still shining.
In the intervening 10 years virtually all asset classes have enjoyed summery conditions – albeit with regional variations and periodic lows – with market pessimists, in contrast to real-life bears, largely forced into hibernation during the extended warm spell.
InvestNow clients have certainly enjoyed their time in the sun. For example, global shares have risen for 11 straight months with most markets now in record-high territory.
But as investment history tells us, share markets do not climb in an unbroken straight line forever. Indeed, the unusually long run of good weather has even the most sunny-side-up of investors searching the horizon for clouds; and the bears might be stirring from slumber in their dens.
We are not suggesting a correction is imminent, but at some point in the future shares, like all asset classes, will experience a period of negative, or low, returns.
A quick look back in time will illustrate the point. If you had invested $10,000 in a NZ dollar-hedged global shares index on July 1, 1999, you would have tripled your money by today (excluding fees and tax).
However, during the 219 calendar months since July 1999, you would have experienced 84 months where the market return was negative – which is almost 40 per cent of the time! Further, during the worst-returning 12-month period contained in that 18-year stretch your shares portfolio would’ve shrunk by an almost unbearable 40 per cent plus.
In the long-term it makes sense that people who invest in companies (shares) should be rewarded for the risk that they are taking with decent returns. However, it is always worth remembering the risk part of the equation.
But while we know the bears will return some time, how investors react to any ‘market correction’ largely determines whether their portfolios suffer long-term damage from any mauling.
Earlier this month we asked you whether you would buy, sell or sit still if share markets fell by 10 per cent in the space of a week, and if that were followed by a further 20 per cent over a week: the results were illuminating.
Of the InvestNow customers that responded, you were mostly unfazed by the prospect with most indicating they you would either stick with your long-term asset allocations or even use the correction in share prices as a buying opportunity.
According to the survey, just 2 per cent of you said you would sell if shares dropped by 10 per cent in one week (a figure that crawled up to 3 per cent if the market then fell by a further 20 per cent over the same timeframe).
Conversely, 68 per cent said you would ‘do nothing’ if markets slumped 10 per cent in a week and 30 per cent planned to invest more in shares. Somewhat counter-intuitively (but in a good way), the survey indicates about 42 per cent of InvestNow clients would do nothing if markets slipped another 20 per cent and 56 per cent would buy more shares in that scenario.
We recognise, of course, that answering a survey is different from facing the snarling reality of a market crash – behavioural finance research, for example, shows that ‘loss aversion’ is generally a stronger human instinct than profit maximisation.
Nonetheless, we are pleased to see the survey finds our investors have at least understood the theoretically rational way to react to falling markets; InvestNow clients are clearly smarter than the average bears.