Panic gripped the market on August 5th after an unfavorable employment report on the US economy, which until then had maintained an enviable growth. The stock markets turned red in practically all regions: the Nikkei fell 12.4% in its worst session since 1987, the Nasdaq fell 6%, the London stock market 2% and the Ibex 35 fell 3.5%. In just a few hours, all the gains that the Spanish index had achieved in the last three months were diluted. while in more than one analysis the term recession was coined for the largest economy on the planet.
The horizon was full of investors who had decided to withdraw their money, threatened by the fear that the stock market’s bloodbath would continue. A serious mistake. At least that is what a study by the British asset manager Schroders explains, which has analysed the data of the last 100 years of the American stock market to demonstrate the importance of “keeping a cool head in times of crisis”, since in most cases patience is rewarded. On the contrary, the less time the investor remains with his bet, the greater the chances of losing all the capital. The shortest period of time that Schroders takes as a reference is 30 days: “if a person decided to invest his money for a month, he would have lost it in 40% of the occasions, that is, in 460 of the 1,153 months of our analysis in the framework of the 100 years analysed.”
Schroders’ reading is that the stock market crash of August 5, as is common in the stock market, is due to “hasty decision-making.” Added to this is the possibility that inflation will reduce the value of the money invested. In recent years, the General Price Index (CPI) data has been high for most major economies. The United States exceeded 9% CPI during the summer of 2022. and in Europe the price spiral reached 10% at the end of 2021“As all cash savers will know, recent experience has been painful,” the report said. Schroders analysts note that the last time cash beat inflation over a five-year period was between February 2006 and February 2011 – “a distant memory now” but one that suggests investors who pull out of their bets should take into account the effect of inflation.
That is why time is key: “Rejecting the equity market in favor of cash in response to a major decline is harmful to long-term wealth.” The longer money is kept in the markets, the risk of loss is diluted. According to the study, over a 12-month period, the probability of recording losses falls to 30%. “And the most important thing is that a year is still a short term as far as the stock market is concerned,” they detail. And over a five-year horizon, that probability of losses falls back to 22%, while over a 10-year horizon it is 13%. One of the most relevant conclusions is that practically no one who has left their money for more than two decades has lost in the stock market.
Market turmoil is just around the corner, and few years have been spared from turmoil, the British agency warns. At least 30 of the past 52 years have seen stock market shocks that have led to the market losing around 10% of its value. In the past decade, this includes 2015, 2016, 2018, 2020 and 2022. And even steeper declines of 20% have occurred in 13 of the past 52 years, or about once every six years.
Schroders also warns that in most cases these are losses from which investors do not recover until many years later. The bank explains that investors who withdrew their money in 1929, after the first 25% drop in the Great Depression, would have had to wait until 1963 to break even. Whereas if they had maintained their faith in the market, they would have had to wait until 1963 to recover their balance. Wall Streetthe break-even point would have been reached in early 1945. Similarly, an investor who switched to cash in 2008, after the outbreak of the financial crisis that year, would still today keep his portfolio below the market value.
The ‘fear index’ warnings
After the big scare at the beginning of August, things seem to have calmed down again. The Vix index, also known as the fear gauge, reached new highs at the beginning of the month as investors feared a recession in the US economy. This indicator, which measures the volatility that traders expect for the S&P 500 over the next 30 days, exceeded the 60-point level on August 5, in a peak of volatility not seen since the pandemic. However, it fell again in the following days and is now trading at the levels prior to that moment of tension.
Schroders insists that if investors remain calm and cool through these peaks, they will be better off, especially in a scenario where they sell their shares and re-enter the market when the stocks are low. The firm’s research shows that if investors had withdrawn their money to buy later, they would have had a return of 7.4% per year, while sticking to equities would have resulted in an annual gain of 9.9%. Nevertheless, it warns, “as with all investments, the past is not necessarily a guide to the future, but history suggests that periods of heightened fear, such as the one we are currently experiencing, have been better for stock market investing than might be expected.”
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