The recent vote by the British population to leave the EU (“Brexit”) has caught the market by surprise. Is it causing you some fear and apprehension about investing in the markets?
If you answered yes, you are not alone.
The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
The conventional reaction to falling markets is to take as much money off the table as possible and wait to reinvest when the market has reached its bottom. However, this is only possible if you can always accurately pick the top and bottom of stock markets which is close to impossible over any proper stretch of time.
US financial services giant JPMorgan ran some analysis not long ago showing that an investor who stayed fully invested in the US S&P 500 index from 1995 to 2014 achieved 9.8% annualised returns. An investor who tried to time the market would have only achieved 6.1% return over the same period if they were not invested during the 10 best performing market days over that 20 year period.
What if investing more money into the share market during periods of volatility (such as we are seeing now from Brexit) can lead to faster recover of your losses and deliver good returns?
At the moment, Brexit doesn’t appear to have anywhere near the same level of negative impact as the credit crisis of 2008 / 2009 but let’s rewind back to September 2008 when Lehman Brothers collapsed (marking the start of the global financial crisis) as an important case study of what happened to investment returns.
The chart above shows the US S&P 500 index starting at 12 September 2008, the last trading day before Lehman Brothers collapsed through to the end of 2010 when markets recovered to levels prior to the collapse.
The table below shows the historical investment returns for the US S&P 500 index based on a “do nothing strategy” versus a simple “invest monthly strategy” during this volatile market period.
During one of the most volatile and uncertain market periods in living memory, a simple invest monthly strategy would have resulted in an investor recouping all losses within 1 year after the collapse of Lehman Brothers. An investor who did not make any additional investments would have taken over 2 years to recover their losses by which time the investor who had invested monthly would have made nearly 21% returns. This is a substantially better return by regularly investing despite the uncertain markets.
The above calculations don’t take into consideration any additional returns that may have occurred through disciplined stock picking. In fact, a number of smart investors around the world made tremendous returns during this period of time by selectively investing in strong listed companies that had been significantly oversold by the market.
Although Brexit right now doesn’t quite have the same negative economic or market impact as the events of 2008/2009, it still presents opportunities to make strong returns over the next few years by not being fearful of investing in somewhat uncertain markets.
If you’re fortunate enough to be holding a decent amount of cash right now, you should be even better placed to achieve strong returns by regularly investing that cash over the next 1 to 2 years. That is the strategy for AtlasTrend’s managed funds where we came into Brexit with approximately 40% cash holding across the funds. As a result, we are now able to carefully and selectively add to our portfolio’s investments.
Yes, Brexit was a complete surprise for the markets but the golden rule for investing still applies. Keep calm and invest regularly.
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