After two stellar years in the investment markets, is your portfolio ready for the inevitable twists ahead?
Investment markets have been very kind to global equity investors over the last two years.
After a period of sideways markets and soaring inflation, the S&P 500 rocketed at the end of 2023 and during 2024.
With historical average returns in the 8-10% range, these 20%+ pa growth rates are returns that patient and disciplined investors should be delighted with.
Most significantly, the last two years saw no extended periods of significant declines.
In 2023, the largest decline was -10% between July and October. In 2024, the worst was a 21-day decline of only -8% between July and August.
While this was a welcome respite from the normal market rhythm, the financial media would likely have been dismayed.
More seriously, there’s a danger that investors will forget the important lessons learnt from past declines.
To prepare you for the possibility of more significant temporary declines in the coming year, below are 3 points you should keep in mind, when others are losing theirs.
1. Declines are normal
It's a feature of the stock market that values do not move in a straight line but instead fluctuate around a generally upward trend.
We refer to this as “volatility.”
A market correction is defined as a 10% drawdown from a previous market high.
While it may sound like a significant number, these events happen far more frequently than most investors believe. Indeed, they come around as often as your birthday, with years like 2024 being the exception.
Since the turn of the century, the average annual temporary decline has been approximately -16%.
While this may surprise you, it’s worth noting that about three in every four years still end with a positive return.
We also know from market history that we expect a decline of more than -30% approximately every five years (on average), as we last experienced in 2020 with the 'COVID Crash'.
2. See the opportunities
We know that stock markets generally provide positive returns about three in every four years.
The one negative year is exactly what earns you the other three positive years. It’s the price of admission for profiting from the collective ingenuity of the hundreds of companies working for you while you sleep.
We encourage you to see the temporary declines as the reason for the stock market’s excellent long-term returns. You can’t have one without the other.
Unfortunately, we can't consistently predict when these fluctuations will happen or when they'll reverse. To be a successful long-term investor, you must accept this with humility.
Market declines will consistently happen throughout your investing life, and your mindset during these times is a choice that will shape your financial future.
Confront them with confidence rather than fear, while being mindful of the opportunities they present.
3. Time heals
Ultimately, what happens in the next year is relatively unimportant to your 30-year+ plans. If you’re investing long-term, the odds are stacked in your favour.
You’re guaranteed to win.
After two years of little volatility, if we experience a decline in the coming months, be encouraged that you're busy earning future returns.
Additionally, if you’re still saving, declines are your best friend, allowing you to buy more units of shares at reduced prices.
While we don’t know where the market will be at the end of 2025, we’re confident about where it will be in 10 years: much higher.
Time is the enemy of market declines, and most investors have plenty of time.
Add patience, and discipline and you're set to benefit from a better investment experience.
