2020 will certainly go down in history as a momentous year, with the tragedy that is Covid-19, the painful global downturn that has ensued, the major curbs on personal freedom and one of the most divisive US elections, carrying the headlines. What will almost certainly be a forgotten as a footnote to the year is the fact that it is looking likely global equities will finish the year slightly up on where they started it.
Yet that is to belie the still raw memory of some of the most severe daily and weekly market falls – and subsequent rapid rises – that investors have ever experienced. Such moments in markets can be disconcerting and, when emotions kick in, can lead to poor decision-making. Being tempted to act on market falls – or the perceived prospect of market falls – is extremely risky and likely to harm your portfolio.
Take a look at the chart below that shows the annual return of developed markets and emerging markets in aggregate (column) and the intra-year fall from that year’s market high (blue dot). 2020 is a good example: the market fell around 25% but is now above its starting point. Likewise, for 2016, which saw an awful start to the year and the Brexit vote, yet the markets ended almost 30% up. Just hanging in there resulted in an annualised return of over 11% over this almost 10-year period, which meant that investors doubled their assets every seven years or so. That is a great outcome.
Figure 1: Responding to market falls is not a good idea
Data source: World equities in GBP 1/2011 to 11/2020. Morningstar Direct © Copyright 2020. All rights reserved.
Actively managed ‘absolute return’ funds, which promise positive returns above cash over two to three-year horizons demonstrate how difficult second-guessing markets is. The recent Financial Times headline ‘Absolute return funds on course for worst ever annual outflows’ says it all. Some funds lost more than 10% this year.
So, when you look back on 2020, just leave your thoughts about the markets in the footnote where it belongs. Many other things were far more important. Let’s hope 2021 brings more joy.