When it comes to investing - patience pays

Investing in stock markets is designed to deliver returns over the medium to long-term. In uncertain environments some investors get nervous, losing sight of their investment objectives. Many are tempted to postpone new investments, and even to sell their current holdings with the aim of reinvesting when the stock market rebounds. However, if you do sell your investments during a correction, you risk turning a potential loss into a real one and you may miss out on any subsequent market rebounds.

During these unnerving times, it’s important to focus on your long-term goals and remember these three important things about investing;

1. Historically, stock markets have gone up over the long-term
2. Large peak-to-trough falls in value in stock markets are inevitable
3. Historically, the biggest gains tend to follow the biggest falls

The challenge is we don’t know when point 2 ends and point 3 begins but we do know that over time you may benefit from simply being patient and remaining invested. Right now, we recommend that you speak with your Financial Broker about the options of sticking with your financial plan and staying invested in a fund that matches your attitude to risk and return.

1. Historically, stock markets have gone up over the long-term

Despite recessions, periods of stock market volatility, and wars, the US equity market, as represented by the S&P 500 total return index, has delivered a positive return in US dollar terms in 40 years out of the past 50 years; that’s 80 percent of the time.

2. Stock market falls are inevitable

Warning: Past performance is not a reliable guide to future performance

Despite strong market gains over the long-term there have been numerous large peak-to-trough falls in the S&P500 total return index. If we roll the clock back to the 1950’s we see that big peak-to-trough falls in markets happen perhaps more regularly than we might think. “Bear markets” are broadly defined as peak-to-trough falls of 20% or more.  In the below study, we look at the US Stock market, as represented by the S&P 500 total return index and include all falls of 19% or more in US dollar terms. This chart shows that falls of this magnitude occur roughly once every 5 years, average a dip of 30%, and the average peak-to-trough period is typically 1 year.

^{Source: Bloomberg, as at 31 December 2019. S&P 500 total return in USD}

3. The biggest gains follow the biggest falls 

History shows us that markets generally bounce back strongly from large setbacks. Taking the same periods above and looking at returns over the 12-months that followed the sharp falls we see how quickly things can change.

^{Source: Bloomberg, as at 31 December 2019. S&P 500 total return in USD}

The key message from these three points is that being patient and remaining invested can result in good outcomes. Even if you time things right and get money out as markets are still falling, you need to again time things well to get back in for the market bounce. In fact, by missing out on a very small number of days with strong return can significantly negatively impact your longer-term returns. The below chart helps illustrate the power of remaining investing and the impact of missing out on those strong days:

Annualised returns of the S&P 500 (in USD): Effect of missing the best days

^{Source: Lipper, a Thomson Reuters company, data from 31 December 1999 to the 31 December 2019. Returns are in USD terms}

These three simple messages are well-understood by investors when things are going well but often get forgotten or questioned in times of stress.

Bottom line

Market volatility is an inevitable part of investing. While current uncertainty can be unnerving, it’s important to remember that stock markets generally rise over the medium to long-term, so investors need to keep a short-term pullback in perspective. Right now, we recommend that you speak with your Financial Broker about the options of sticking with your financial plan and staying invested in a fund that matches your attitude to risk and return.

Warning: If you invest in this product you may lose some or all of the money you invest. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: These funds may be affected by changes in currency exchange rates.

^{Except where stated as otherwise, the source of all information is Aviva Investors as at 24/03/2020. Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Portfolio holdings are subject to change at any time without notice and information about specific securities should not be construed as a recommendation to buy or sell any securities.  The funds referred to in this document may be linked to an insurance-based investment product and the Key Information Document (KID) for this product is available at https://keydocs.aviva.ie/. The Risk Ratings of the funds referred to in this document differ from the corresponding Summary Risk Indicators shown in the KID.}