When markets slump, return to the golden rules of investing

Stock markets have been turbulent since the start of the year and there are signs that a bear market might be coming – this is a sustained period of decline in a market which falls 20% or more from its peak.

Even the best-known companies in the world have not been immune to the slump in share prices – Amazon is down 30% this year, for example. Recently the dark mood in stock markets has spread and the value of bonds, currencies such as the pound and the euro and more recently, cryptocurrencies have been badly affected.

For people with investments, logging on to check the value of their portfolio and seeing losses has become a daily reality.

It’s been especially discouraging for people who began investing in the past few years – and we saw many people take up investing for the first time since the Covid pandemic began. For newer investors this will be the first period of continued decline that they have experienced, and it’s probably not at all what they expected.

There are a range of challenges facing the global economy which are making investors think that companies will struggle to grow in the short-term, including the war in Ukraine, central banks around the world raising interest rates and inflation higher than it’s been for a generation.

Humans are hard-wired to continually anticipate and manage threats, and when it comes to money that means fretting over whether an investment portfolio will lose more value – and if so, how much more.

If recent market events are keeping you awake at night, take comfort from these four golden rules of investing.

Golden rule #1: No investment rises continually without interruption.

For many Britons, houses are for investing in as much as for nesting. If you had your home valued every day to the precise pound and pence that it would sell for that same day, you would find its price fluctuates substantially over time.

No-one has their home valued every day. Most people choose a home to purchase because it suits their circumstances, because paying a mortgage is a way to build up capital through gradually owning more of an asset, and with the hope that eventually the property may be worth more.

The same goes for stock markets. Just because you can see the precise valuation of your portfolio in your account every day, doesn’t mean you need to be concerned about day-to-day fluctuations.

Investing gradually over time can be a good way to build wealth, and although it comes with risks of capital loss, just like home ownership there is the potential for a portfolio of shares to be worth more in years to come.

Golden rule #2: Return to the reasons why you invested in the first place.

As humans we feel losses more intensely than gains, so feeling bad right now is understandable. It can help to mentally refocus your energy on your initial goals. How far along are you? Are you any closer to your aims, even a little bit?

If you quit now, will you still have those goals? Because you may have to start again with investing, and if you wait until a future point when markets have recovered then those same investments that you sold out of today might be more expensive.

Golden rule #3: You can’t predict the future

When something unexpected has happened and investment markets are down, remember that just as you couldn’t predict they were going to fall, you also can’t predict when they’re going to go back up again.

So though concern when your portfolio is down is natural, a panicked reaction – perhaps pulling out entirely – doesn’t necessarily make sense. The lesson from history is that the world’s major stock markets have trended upwards over time – and although that doesn‘t mean that past performance will be repeated in the future, potentially markets could rise again over the long-term.

Golden rule #4: Stock markets fall more often than they rise

Nutmeg’s investment team crunched the numbers and found that since 1927, the benchmark US stock market has closed for the day down at least 5% from the market’s previous maximum point more than 50% of the time¹.

It may sound hard to believe, but there have been 23,704 days when the stock market has traded since 1927 and 12,505 of those days have ended below the high watermark¹. And in fact there have been 9,035 days when the S&P 500 has closed 10% below its height – which equates to 38% of the time.

So whilst on any given day investing can be a painful business, looking at a portfolio that has fallen from its peak, over time it has the potential to be more rewarding – after all, $100 invested in the S&P 500 in 1927 (adjusted in today’s value to $1, 657) would be worth $518,571 and although there is no guarantee the next 100 years will show the same trend it does suggest history looks kindly on markets over the longer-term.

The lesson from the data is clear: when you invest in the stock market, even if the charts show large increases over time, long-term investors will have spent a lot of time watching their shares fall before they begin rising again.

Sources

Data: Macrobond, UK
Based on full equity portfolios

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance