Finance
Probably the question I get asked the most often ! Evidence shows that holding your nerve during stormy market conditions can pay dividends for investors in the long run . In 2013 – long before the latest bout of stock market turmoil – a team of behavioural economists at Barclays produced a paper with a highly intriguing title : Overcoming the cost of being human . The thesis argued that investors are their own worst enemy when they allow emotions to get the better of their reasoning . People often make less than they should from investments by buying or selling at the wrong times . In fact , they often make avoidable and unnecessary losses when they become panicked and reverse investment decisions prematurely .
It is part of our genetic make-up to react quickly to fear , which is why so many investors , having bought the right funds for the long term in a period of calm , then sell them at the first sign of market turmoil . It can happen to anyone . During the opening weeks of 2016 , when a market meltdown came out of a clear blue sky , it made even hardened market professionals take decisions based on fear rather than logic . However , all the statistics of long term trends show that if we could curb our fear , we would be much better off .
The Barclays paper contains a heat map of movements in the MSCI World Index of 24 developed world stock markets for the 40-year period from 1970 to 2010 – the index is a proxy for a geographically diversified share portfolio . This analysis shows that four-fifths of all losses are incurred by investors with a holding period of less than five years . However , investors who were willing to ride out initial volatility and hold on for 12 years made a profit , whether they bought originally at a market peak or a market trough . Trying to time the market , by buying in troughs and selling at peaks , has little long-term value because the highs and lows become less relevant with the passing of time . Periods of market turmoil – such as the 1987 crash , or Black Wednesday in 1992 barely show up on a chart of long-term trends .
Three of the recognised global authorities on long-term investment returns are London Business School academics Elroy Dimson , Paul Marsh and Mike Staunton . They compile what is known as the DMS database1 , published every year by the Credit Suisse Research Institute . The message of their work is that the essentials of success are to hold for the long run and have a diversified portfolio . There are , however , no absolute guarantees . Hence the key question : when talking about the long term , how long do we mean ?
The Credit Suisse study helps here . It shows that in the UK , from 1900 to 2015 , shares returned an average of 5.4 % per annum , while bonds delivered 1.7 % and cash 1 %. However , it also underlines that there can be periods of underperformance , like the one we are currently living through .
Few investors like periods of volatility and where investor behaviour may have caused light ripples in the markets 30 years ago , now it can create tidal waves around the world as innovation and advances in global technology have a much quicker effect .
We may not like volatile markets but in truth we have to learn to live with them . History is firmly on our side in suggesting that the stock market should be home for a reasonable proportion of our money . Coping with volatility is the price we have to pay for the prospect of good long-term returns . Patient investors , with a diversified portfolio of assets , should be able to ride out the volatile storm .
Please bear in mind equities do not have the security of capital which is characteristic of a deposit with a bank or building society , as the value and income may fall as well as rise .
1 Credit Suisse Global Investment Returns Sourcebook , 2016
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