4 key tips for keeping a cool head in a crisis

Duncan Lamont

Schroders

The upsetting scenes in Ukraine have sent shockwaves through us all as individuals and through global stock markets.

However, as tensions soar, investors should try avoid making rash decisions in the heat of the moment. In this wire, you'll find four reasons why you should do just that, backed by bite-sized pieces of long-term data. 

Our live blog on the Ukraine crisis will be updated regularly throughout the week, it can be found here.

1. Stock market investing is very risky in the short run but less so in the long-run – unlike cash

Using almost 100 years of data on the US stock market, we found that, if you invested for a month, you would have lost money 40% of the time in inflation-adjusted terms i.e. in 460 of the 1,153 months in our analysis.

Past performance is not a guide to the future and may not be repeated. Stocks represented by Ibbotson SBBI US-Large Cap stocks, cash by Ibbotson SBBI US (30-day) Treasury Bills. Data January 1926-January 2022. Source: Morningstar Direct, accessed via CFA Institute. 

However, if you had invested for longer, the odds would shift dramatically in your favour. On a 12-month basis, you would have lost money slightly less than 30% of the time. Importantly, 12-months is still the short-run when it comes to the stock market. You’ve got to be in it for longer.

On a five-year horizon, that figure falls to 23%. At 10 years it is 14%. And there have been no 20-year periods in our analysis when stocks lost money in inflation-adjusted terms.

Losing money over the long run can never be ruled out entirely and would clearly be very painful if it happened to you. However, it is also a very rare occurrence.

In contrast, while cash may seem safer, the chances of its value being eroded by inflation are much higher. And, as all cash savers know, recent experience has been even more painful. The last time cash beat inflation in any five-year period was February 2006 to February 2011, a distant memory. Nor is that something that’s expected to change any time soon.

2. 10%+ falls happen in more years than they don’t – but long term returns have been strong

By Thursday of last week, global stock markets had fallen by 10% from their peak. They rebounded on Friday but are heading lower again early this week.

10% may feel like a big fall but it’s actually a regular occurrence. The US market has fallen by at least 10% in 28 of the past 50 calendar years i.e. more often than not. In the past decade, this includes 2012, 2015, 2016, 2018 and 2020.

Past performance is not a guide to the future and may not be repeated. Source: Refinitiv and Schroders. Data to 31 December 2021 for MSCI USA Index. 

Despite these regular bumps along the way, the US market has returned 11% a year over this 50 year period overall.

The risk of near term loss is the price of the entry ticket for the long term gains that stock market investing can deliver.

3. Bailing out after big falls could cost you your retirement

While the market hasn’t fallen too much so far, further volatility and risk of declines cannot be ruled out. If that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash.

However, our research shows that, historically, that would have been the worst financial decision an investor could have made. It pretty much guarantees that it would take a very long time to recoup losses.

For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, would have had to wait until 1963 to get back to breakeven. This compares with breakeven in early 1945 if they had remained invested in the stock market. And remember, the stock market ultimately fell over 80% during this crash. So, shifting to cash might have avoided the worst of those losses during the crash, but still came out as by far the worst long-term strategy.

Similarly, an investor who shifted to cash in 2001, after the first 25% of losses in the dotcom crash, would find their portfolio still underwater today.

The message is overwhelmingly clear: a rejection of the stock market in favour of cash in response to a big market fall would have been very bad for wealth over the long run.

Past performance is not a guide to the future and may not be repeated. Source: Federal Reserve Bank of St. Louis, Robert Shiller, Schroders. Monthly cash return 1934-2020 based on 3 month Treasury bill, secondary market rate: 1920-1934 based on yields on short-term Untied States securities; 1871-1920 based on 1-year interest rate. 1871-1920 data only available annually so a constant return on cash has been assumed for all months during this period. Other data is monthly. All analysis is based on nominal amounts.  

4. Periods of heightened fear have been better for stock market investing than might have been expected.

Escalating tensions between Russia and Ukraine have recently sent the stock market’s “fear gauge”, the Vix index, higher. The Vix is a measure of the amount of volatility traders expect for the US’ S&P 500 index during the next 30 days.

It has recently risen to a level of 32 on Monday 28 February, well above its average since 1990 of 19, and steeply higher than its start of year level of 17. It’s not hard to imagine a scenario where it moves even higher in the coming days as events continue to unfold.

However, rather than being a time to sell, historically, periods of heightened fear have been when the brave-hearted have earned the best returns. On average, the S&P 500 has generated an average 12-month return of over 15% if the Vix was between 28.7 and 33.5. And more than 26% if it breached 33.5.

Past performance is not a guide to future performance. Formally each range includes the upper limit but not the lower limit e.g. 11.3-12.0 captures entries where the Vix is greater than 11.3 but less than or equal to 12.0. Data covers 2 January 1991 to 24 February 2022. Schroders, Refinitiv.

We also looked at a switching strategy, which sold out of stocks (S&P 500) and went into cash on a daily basis whenever the Vix entered this top bucket, then shifted back into stocks whenever it dipped back below. This approach would have underperformed a strategy which remained continually invested in stocks by 2.3% a year since 1991 (7.6% a year vs 9.9% a year, ignoring any costs).

A $100 investment in the continually invested portfolio in January 1990 would have grown to be worth twice as much as $100 invested in the switching portfolio.

Past performance is not a guide to future performance. Note: Levels in excess of 33.5 represent the top 5% of experience for the Vix. Portfolio is rebalanced on a daily basis depending on the level of the Vix at the previous close. Data to 24 February 2022. Figures do not take account of any costs, including transaction costs. Source: Schroders, Refinitiv. 604202

As with all investment, the past is not necessarily a guide to the future but history suggests that periods of heightened fear, as we are experiencing at present, have been better for stock market investing than might have been expected.

Learn more

For further insights from the Schroders, please visit our website


........
Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Duncan Lamont
Head of Research and Analytics
Schroders

Duncan Lamont is responsible for high quality thought leadership research, aimed at offering insights which help our clients make better investing decisions. Since joining Schroders, Duncan has written and co-authored a wide range of papers,...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.