If you search online for the headline ‘wiped off the stock market’, you will be faced with countless tabloid news outlets sharing headlines such as;
‘£133bn wiped off FTSE 100 this week’,
‘Billions wiped off FTSE 100 as fear of…’
and ‘Market rout wipes more than £51bn off FTSE 100’.
You could be forgiven for thinking that investment markets are in crisis almost every day!
Although investment markets have more up years than down, the situation in 2022 did feel like a year-long series of crises and news outlets were more than happy to shout from the rooftops about it. The main investment asset classes, bonds and equities, both ended the year down, which is something that doesn’t happen often. Usually the relationship between bonds and equities is such that when one is strong, the other is weak.
The ups and downs seen in the stock market were in-keeping with what we would expect given the uncertainty around the war in Ukraine, fears of recession and instability in major governments. Disappointing, but nothing out of the ordinary.
Bonds on the other hand, had their worst year since records began, a real outlier in terms of negative return. The perfect storm of rocketing inflation and the resultant central bank interest rate tightening to try to control it, was mainly to blame. A shock certainly, but a manageable one within the context of a robust, long-term financial plan.
A mere 6 weeks later, on 15th February 2023, the FTSE 100 rose above 8,000 for the first time in its history. Although it made the news, it didn’t feature nearly as prominently as a market crash. We didn’t see a ‘Billions wiped onto the stock market’ headline. Most of the coverage was from industry experts trying to highlight the lack of interest from the usual tabloid press.
So why, if all of these crises around the world are still ongoing, have we had a strong start to 2023?
Markets are forward pricing machines and they often react positively to what is seemingly still negative news. The news just needs to be less bad than it was before, for example relative stability in government, inflation still very high but looking like it has peaked and starting to reduce, interest rates still climbing but more slowly and getting close to a lower peak than forecasted in late 2022.
Each security price reflects the collective knowledge of all market participants, and the information available in 2022 was predominantly negative with gloomy forecasts of interest rate rises, double digit inflation and the possibility of a long-term recession. The fact that these forecasts have eased a little has helped markets rally in 2023. Volatility is still around and with markets weakening again over the last couple of weeks, it doesn’t look like being a smooth ride upwards.
The good news is that by adopting an evidence-based approach to investing you don’t get caught up in the emotion of all the headlines. Instead of yearning for a crystal ball, you can be reassured by decades of data which show that over the long-term, buying and holding the market rather than trying to outsmart it wins in the vast majority of cases. Paying fund managers to pick individual stocks they think will out-perform simply adds cost and erodes value over any significant period, as evidenced by the most recent SPIVA report (a twice-yearly report by Standard & Poor’s measuring active fund managers against their chosen index). It shows that almost 93% of European funds investing in US equities underperformed the S&P500 index over 5 years, increasing to over 97% over 10 years. Global Equity funds didn’t fare much better, with over 90% underperforming over 5 years, and 92% over 10 years. This equates to a worse than 1 in 10 chance of picking a fund that survives for that time period and out-performs its benchmark index.
Our evidence-based approach to investing allows you to take any negative tabloid news with a pinch of salt and new ‘all time market highs’ in your stride, safe in the knowledge that markets are your ally not your enemy over the long-term. Sticking to a robust investment strategy as part of a highly personalised financial plan still provides your best chance of success.
If you would like to discuss our investment approach or any other financial planning subject in further detail, please contact us on 0131 220 0000 or firstname.lastname@example.org.
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