Periods of uncertainty, like the one we find ourselves in at present, have a way of magnifying every headline and testing our discipline. Inflationary pressures, geopolitical tensions, shifting policies and market volatility are dominating the conversation. These moments are unsettling, but they are not new.
It’s a natural reaction to feel uneasy when markets fall sharply
Market falls are not unusual
History has shown that despite our tendency to catastrophise, market downturns are an inevitable feature of investing in shares. It can be challenging when we’re in the midst of market turmoil, such downturns tend to be relatively short lived.
The ‘tariff tantrum’ has led the US share market (S&P500) to its 4th worst 2-day loss in over 50 years. Only during the 1987 market crash, the GFC in 2008/09 and the onset of Covid surpassed last week’s 2-day falls.
However, markets do recover – following each of those historical market falls, the next 5 years realised significant gains, as shown below.
| Market Disruption – Event | Return over Next 5 years* |
| Stock market crash – October 1987 | +53% |
| Global Financial Crisis – November 2008 | +71% |
| Covid – March 2020 | +148% |
*return of the S&P500 over the following 5 years after record falls over 2 days.
Enduring market downturns is an essential part of investing and is why investors are effectively rewarded over the long term – without uncertainty (risk), there wouldn’t be an equity premium and higher long-term returns.
Much can change quickly
It is common that the share market’s worst days are often immediately followed by the best. Things can look very different very quickly – that’s the nature of market volatility.
As noted in the graphic below, the relative proximity of the very best (green bars) and worst (brown bars) trading days highlight the futility of trying to time the market.
Sources: Vanguard
Remaining invested to benefit from the best days the market has to offer makes a huge difference to your eventual returns.
Markets may have over-reacted
There is a tendency for equity markets to over-react to bad news. Often, it’s the uncertainty the news creates rather than the news itself that causes market turmoil. Yes, markets may well fall further. It’s quite possible, though, that as the impact of Trump’s tariff announcement becomes clearer, they may start to recover.
Capitalism has proved very resilient
Throughout history, capitalism has shown itself to be extremely resilient. Markets have fallen many, many times, but eventually they have always recovered – even after world wars. Staying invested puts you in the best possible position to benefit from a recovery when it comes.
Tune out the noise
Some commentators may be warning that the sell-off is far from over and the financial headlines will inevitably be peppered with scary words like “mayhem”, “rout” and “bloodbath”.
Predictions about future events by so called experts should be approached with caution – unless they have a time machine, no one can definitively know what will happen next.
The make-up of your portfolio hasn’t changed
Whilst your portfolio value may be marked down (on paper) over recent weeks, your portfolio hasn’t changed. It remains a high quality and broadly diversified portfolio, which includes assets that have increased in value during the share market decline (e.g. government and corporate bonds).
Your investment strategy
While uncertainty clouds the short term, our investment strategies are anchored in long-term fundamentals, not forecasts. We don’t chase what’s popular, nor do we flee from what’s uncomfortable.
The evidence shows us that, from an investment perspective, the best thing to do in these situations is usually nothing at all.
It can be disheartening to see portfolios suddenly fall in value, but your long-term interests are best served by ignoring the noise (e.g. the market ‘bloodbath’ headlines) and resisting the temptation to act.
It’s simple advice that is not always easy to follow.
None of this is intended to downplay any discomfort you may be feeling because of recent market developments. But it’s important to maintain a healthy perspective and stay focused on your long-term investment goals.
