The history of financial markets is littered with stories of fortunes made from the investment notion of “getting it right, at the right time.”
While the recent contraction of global equity markets might cloud this notion, the tech titans of the recent past were generally regarded as having perfect timing as the world transitioned to and embraced the digital technology revolution of the 21st century.
The same could be said of the great pioneers of the industrial revolution a few centuries ago, which saw select innovators and risk takers get it right as the world shifted from an agrarian and artisan economy to one dominated by manufacturing.
From an investment perspective, the countries, companies and individuals that embraced and led the innovations that enabled these revolutions arguably timed it perfectly.
But the history of financial markets was also littered with many entrepreneurs and investors whose timing was not as perfect. And many of their stories are not so glorious.
That is the risk associated with relying on timing. And as modern investment strategies have shown over the past 100 years or so, it can be a perilous game trying to time the peaks and troughs of the financial markets in the pursuit of long-term wealth.
Investors around the world have been enduring a sustained period of volatility recently. For many, it has created a completely understandable heightened sense of anxiety about not only the short-term financial implications of this volatility on their portfolios but also what it might mean for the retirement that many have imagined lies ahead.
Purely from an investment sense, this is what market volatility can do. In some, it creates doubt, in others it creates panic and for nearly all, volatility creates anxiety.
When investors see the value of their portfolios diminishing, their aversion to losses can compel them to sell into a falling market. And once they have sold, many then stay out of the market, feeling burnt by the experience.
But that very reaction can cost investors dearly, as those who sit on the sidelines risk losing out on periods of meaningful price appreciation that can follow market downturns. Even missing out on just a few trading days can take a toll.
It is a useful reminder that time in itself is, essentially, one of the best investment defences to keeping the retirement picture intact.
In this sense, the old maxim runs true: time, not timing, is key to creating long-term wealth.
Showing patience amid financial market volatility may be hard but it can be rewarding. Global equity markets in particular have a reassuring history of recoveries. For example, after hitting lows in both August 1939 and September 1974, the Standard & Poor’s 500 Index bounced back strongly, averaging annual total returns of more than 15% over the next 10 rolling 10-year periods in both cases.
Furthermore, returns in the first year after the five biggest declines of the S&P 500 since 1929 have ranged from 36.16% to 137.60% and averaged 70.95%.
And while recoveries can never be guaranteed, history shows the benefits of staying invested over these periods were significant.
Five biggest market declines and subsequent five-year periods 1929–2021 (USD) – US date style
As a long-term investor, Capital Group believes that investment portfolios with a track record of downside resilience and lower volatility can help protect investors and keep them reassured. Calm analysis and long-term thinking can be an investor’s best friend in volatile times.
It is not easy riding the rollercoaster that investment markets occasionally throw up, and is even more difficult when society as a whole and the global economy are challenged by unknowns like a global pandemic and rising geopolitical conflict.
But to ensure that investors can keep on track for the retirement that many of them have imagined, and worked towards, we believe it is critical to stay invested over the long term, through the highs and lows.
Matt Reynolds is an investment director at Capital Group (Australia).
