So the US stock market as measured by the S&P 500 index has officially entered ‘bear market’ territory.
A bear market is when the relevant stock market has fallen 20% from its last peak. It doesn’t really mean anything apart from the symbolic 20% fall. It doesn’t really impact the economy and is different from a recession.
As the US stock market makes up around 50% of the global market it’s highly likely you have seen significant falls in the value of your retirement savings over the last few months.
So what to do? It can seem very scary to see your lifelong, hard earned savings continue to fall. One client recently described it to me as a tap constantly dripping and losing water.
So should you be making changes to your investment strategy?
The Unimportant Numbers
Let’s start by looking at the unimportant numbers. The stock market returns (dividends re-invested) from some of the leading markets over a 1 month period up to 27th June 2022.
You’ll understand why these are unimportant shortly.
UK – FTSE All Share Index: -4.92%
US – S&P 500: -3.36%
Global – MSCI World: -3.36%
I’ve picked the last month as people including the media tend to focus on the here and now.
The numbers above are unimportant because your retirement is hopefully not going to last a month. It’s going to last 30 years+!
The Important Numbers
Annualised stock market returns over the last 30 years up to 27th June 2022.
UK – FTSE All Share Index: 7.66% per year
US – S&P 500: 11.11% per year
Global – MSCI World: 8.88% per year
Over the last 30 years there have been 6 ‘bear markets’ in the UK stock market alone meaning sharp market falls are much more common than you might think.
Even factoring in these bear markets, the important numbers are still impressive.
Over the last 100 years there have been 23 UK bear markets with the average duration being 1 year and 6 months and the average fall 35%.
Missing the best days
Of course we would all like to avoid the falls and it can sometimes seem odd to sit on your hands and watch your retirement savings go down. There’s probably an urge in you that feels like you should be doing something like pulling your money out of the stock market and parking it in cash, especially with all the gloomy economic forecasts.
The problem with timing the market (which no one has ever been able to do consistently) is that you may end up missing some of the best days when returns are highest.
Overall stock market returns over a long period of time are usually driven by just a few days of outstanding returns and if you miss those days the difference can be dramatic.
If you were to make changes to your investment strategy because you think ‘this time is different’ then the other problem you have is where to put your money?
Unfortunately we are in one of those times when it is a perfect storm for investing. Inflation is high, interest rates are going up and economic growth prospects are poor.
In this environment pretty much every asset class goes down which is why we have seen even ‘low risk’ portfolios fall significantly more in value than normal.
If you were to choose cash as a place to park your money for now because it doesn’t fall in value you need to consider the impact of inflation. At the time of writing inflation as measured by the Consumer Price Index (CPI) is at 9%. If it stays at this level for a year or so it means your money in cash has actually declined in value in real terms by 9% minus any interest you have been able to earn.
Your investment strategy should be linked to your long term financial and lifestyle goals as well as your attitude to investment risk.
Once you have a portfolio aligned to your goals it should only really need to change if your circumstances change.
For most people, retirement is going to be a 30+ year journey and you need the returns from stock market investments to ensure your money lasts.
So focus on the important numbers. The long term returns. Unfortunately we can’t have these without some volatility along the way. It’s the price of admission for watching our portfolios deliver great returns over the long term.
One final thing to remember is that now is actually a great time to buy. The stock markets are on sale meaning you can pick up far more units for your money than if you were buying at the top.
Even if you don’t have the spare cash to buy, a well-constructed portfolio should still produce dividends that can be re-invested to buy more units in a bear market. This will supercharge your recovery when it happens.
If you would like a review of your investment strategy to ensure you are best placed to achieve the retirement you desire then please schedule a no obligation free 15-minute call.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.