What are the markets going to do? How will the tax laws change? When will interest rates come down?
Clients can’t help but ask these questions, it’s only natural, but how do we explain that despite our knowledge and experience, we don’t have a crystal ball. No one does.
Perhaps we can position it to them that this is a good thing.
Let’s think back 25 years ago. Mid-1997 and, in the UK at least, the economy was looking relatively healthy; Britain had just won the Eurovision Song Contest and the country had just elected a new government on the back of the optimistic campaign slogan: “Things can only get better”.
But imagine you’re an investor back then and you get a glimpse of what’s to come. You might not think the picture too rosy: in just a few months’ time, economic problems in Asia would spark fear of worldwide economic collapse – this would pale in comparison to the Global Financial Crisis (GFC) a decade later.
Along the way there are a list of events that will leave the market reeling – the dotcom bubble bursting, the September 11 terrorist attacks, a decade of ‘stagnation’ in Europe followed by Brexit, the Covid pandemic and, most recently, Russia’s invasion of Ukraine.
Knowing all of that, would you invest?
For every negative, there’s a positive around the corner
Of course, back to the present day, and we know now how things have panned out.
Even with all that uncertainty, markets have continued to climb to new highs. Those who invested wisely and willing to go the distance are likely to have seen their savings grow.
Take a look at a big financial index like the MSCI All Countries World Index (ACWI). Here, big European companies such as Nestle rub shoulders with US corporations such as Apple and emerging market giants like Taiwan Semiconductor. According to a research tool from investment app Curvo, investing the MSCI ACWI would see your investment grow more than four times between July 1997 and July 2022.1
And we can see elsewhere that this is no accident.
The FTSE All Share, made up of large and medium-sized UK-listed companies, has also had notable dips in performance around large global events such as the GFC and Covid-19. But it too has continued to rise – it’s doubled since the early 2000s. And looking back at the annual returns for the world’s oldest stock index, the Dow Jones, since the turn of the last century, returns have only been in the red for about a third of the time.
For every negative ‘surprise’ experienced by the market, there are usually positives to follow that spur it on to greater heights.
Source: Investing.com
Annual returns of the Dow Jones since 1900
Source: Macrotrends
Keep looking long term
So, what does all this looking back tell our clients?
Hopefully it’s a reminder that even though we’re in a period of what seems like extreme uncertainty, many of these events are only damaging in the short term. While some may have more enduring repercussions, others are less harmful for long-term investment performance. While we still have to pay close attention to challenges from the Russia/Ukraine conflict, rising energy costs and the threat of global recession, they’re not a reason to lose our grip on the plan.
Perhaps it’s also worth a reminder that investing isn’t about trying to predict the future. It’s not making a bet on which stocks will thrive and which will fail to recover. It’s about making a calculated choice that, whatever the short-term hardship, human ingenuity will find a way to solve whatever problem stands in the way.
Finally, we can say that although we can’t tell precisely what happens next, what we do know from previous experience is that markets don’t stay down for long. Even with the myriad of risks currently on the horizon, we can be confident that recovery is coming.
In the meantime the next best thing to a crystal ball is of course, a financial plan.