I am going to address 2 core investment principles in this article.
1) Investment markets go up and down over time. We know this for a fact and see it day in and day out.
Investment management theory tells us that there is an almost equal probability of markets going up or down from one day to the next, or to put it another way there is something like a 51% chance a stock market will go up and a 49% chance it will go down, from the start to the end of one day.
However, that volatility, or risk of a loss reduces consistently over time, such that the risk of loss over a 10 year period is almost zero. This is illustrated below in a graph taken from the latest JP Morgan Quarter 3 2023 State of the Market report.
2) The second core principle to address is that whilst markets go up and down, in the long run, they trend upwards. Markets go up over time.
You can see this in the graph of the S&P 500 index below. From the same JP Morgan report, it shows the relative performance of the US stock market as captured by the S&P500 since 1990.
This graph shows there have been some steep declines, in 2000 and 2008 for example, but there has been more growth than contraction, meaning the market value has gone up over time.
This reflects as returns for investors and helps to address some very important questions that investors will sometimes find themselves pondering or asking their adviser about.
- Is the market expensive right now?
- Is it a good time to invest?
- Should I sell now?
- Should I wait for the market to dip before buying? Or conversely, should I wait until I have seen recovery before entering the market?
All of these issues can be addressed with time in the market, staying the course of your investment, and not trying to second-guess cycles.
Above all though, the decisions you make, and the answers to these questions, should really be contingent on your objectives.
If you find yourself asking these questions, reframe it into: What am I trying to achieve? What is my goal with this investment?
That should help provide some clarity and remove the short-term impulse to react.
Of course, if you do have questions about an investment, we always welcome you to contact us at Black Swan Capital. Because we are objectives based, we will focus on what is right for you specifically, knowing that what is right for one person, might not necessarily be so for the next.
We are also aware that the sheer volume of finance news can be confusing and make you second guess your decisions. It reminds us of research that came out in 2021 called When Do Investors Freak Out?: Machine Learning Predictions of Panic Selling. It was interesting to read about the demographic profile of those more likely to make panic investment decisions (i.e. ‘freak out’), but what was more interesting was the impact of their actions. It was found that investors who made reactionary changes to their investments either exacerbated losses or missed out on gains.
The summary of all of this is, that it is good to have an objectively critical assessment of your investments, but to remember that when it comes to investing time is your ally; it can reduce volatility and help you achieve returns across investment cycles.