At the time of writing, share markets are experiencing significant volatility, swinging both up and down. It’s no surprise that many investors are feeling uneasy about their portfolios. That fear is only amplified by the relentless news cycle and commentators insisting that everything is “unprecedented”.
Some investors may feel tempted to make changes to their portfolio, hoping to put an end to the ups and downs. And it’s understandable, watching your hard-earned money drop by thousands in a single day can be deeply unsettling.
But making changes in response to these emotions is rarely backed by historical evidence. In most cases, it’s a reaction driven by fear, not reason.
“But this time it’s different!”
This is one of the most common claims made by media commentators and finance analysts. They’ll often say something like, “Yes, it made sense in the past to ride out the ups and downs, but this time is different because of X, Y, or Z.”
This of course is ridiculous. Every crash is caused by something different, that’s the only thing they have in exactly in common. Here are just a few recent examples:
- 2000 – The Dotcom crash, fuelled by speculation on internet-based companies
- 2001 – The 9/11 attacks
- 2008 – The Global Financial Crisis, triggered by the US housing bubble and excessive risk-taking by financial institutions
- 2020 – The COVID crash, driven by the uncertainty of a fast-spreading global pandemic
- 2022 – A near 20% decline linked to the war in Ukraine, rising interest rates, and broader geopolitical instability
Their commonality is their difference. So, when someone says, “This time is different, so act differently”, it probably should just be ignored – history is not on their side.
What hasn’t changed is what tends to work: staying invested, sticking to the plan, and resisting the urge to outsmart the market. The reason is simple – markets are entirely unpredictable in the short term, no matter what the headlines say.
“But this smart person said I should get out of the market!”
In every market crash, there’s always someone who has convinced themselves that they know what’s coming next – or they’re trying to sell you on something. Either way, their commentary is not a solid foundation for making investment decisions for the long-term investor.
Let’s take a look at some of the predictions made during a previous crash: the early 2020 COVID downturn.
If you were reading these headlines in late March 2020, you’d likely think there was only one direction for the share market (S&P500) – down. These quotes, often from respected economists and major investment banks, would have rattled even the most confident investors. For someone new to investing, they might have been enough to prompt a change in strategy, perhaps a pause in regular investing or even a full shift to cash.
What Actually Happened?
All of these headlines were from the weekend of the 21st of March 2020. What followed was the exact opposite of what had been predicted. The COVID crash officially ended at market close on Monday 23 March 2020.
- By the end of the week the market was up over 13%
- By the end of April, it had risen by 30%
- By the end of August, the market had fully recovered, gaining more than 50% from the bottom
Despite a 35% crash early in the year, the S&P 500 ended 2020 with a total return of over 16%.
Lessons
The key takeaway is that short-term predictions about the share market are essentially worthless to long-term investors.
Headlines like these are crafted to grab attention, often by stoking fear and uncertainty. This won’t change in future crashes; it’s just how the media works. However, volatility is not the enemy. In fact, it’s the very reason we’re able to earn higher returns from shares than we do from cash.
Investment portfolios should be built with these situations in mind. Whilst we don’t know when the next crash will happen, or what will cause it, we can be certain that it will happen. And just as certain is the fact that some people will try to profit from the fear and panic these periods bring.
A long-term investor would do well to ignore these antagonisms.
Summary
When we seek higher returns than cash, volatility is always a side effect. It’s the short-term pain we must endure to achieve long-term gain. Investors must prepare for this and embrace it when it comes. For without it, the gain wouldn’t be possible.
Each time there’s a market crash, there will be those who say, “This time is different”. And yet, every market crash in history has failed to destroy the idea of a long-term investment portfolio. These opinions can be swiftly discarded.
If we work upon the generous assumption that nobody can tell the immediate future, then why should a long-term investor let themselves be swayed by those trying to do that exact thing?
Throughout history, the share market has rewarded its investors handsomely. After all, without such rewards, the share market itself would cease to exist. Investing in shares isn’t a short-term bet on the near future; it’s an investment in the idea that risk-taking creates rewards over the long term. A strong belief in this principle should prevent any short-term, emotional decision-making regarding a long-term investment portfolio.
Jack Bogle, founder of Vanguard, put the point of this article very simply:
“Stay the course. No matter what happens stick to your program. I’ve said stay the course a thousand times and I meant it every time. It is the most important single piece of investment wisdom I can give to you.”
If it’s good enough for the founder of Vanguard, it should be good enough for you.
Send this article to friends and family that may be feeling worried or stressed about current market events.
