Over the past 10 weeks, I have travelled to Belfast, Manchester, Liverpool, Edinburgh, Glasgow, Preston, Newcastle, Carlisle, Sheffield, Horsham and Guildford. Firstly, I must again profess my love for the UK, and all its people and places (don’t tell my Chicago-based friends and family).
Second, it was sunny every single day. I was in each of these places on random days, and on each of these days, the sun’s rays felt like good omens. My hotels was lovely, the meals at each restaurant were fab, client meetings went well, my trains were all on time – even the birds were singing.
Of course, the running joke with the colleagues who look after these regions is that their cities are always sunny and perfect. But as much we hope these good days are perpetual, it would be silly to ignore the fact that there are bad days as well.
In times when market valuations are as high as they currently are in some sectors and geographies, volatility is further amplified.
But what we long-term investors need to remember is that staying invested allows us to capture the best days of the markets. Here are a few fairly staggering facts on staying invested. When investing in the FTSE All Share index between 1996 and 2016, if an investor stayed fully invested throughout the 20 years, they would have earned an annualised rate of return of 7.4 per cent.
Timing is key
Missing just the 10 best days would have provided just 4.2 per cent, missing the 30 best days would have provided a measly 0.2 per cent, and even worse: missing the 50 best days would have actually lost an investor money.
Timing the market for those perfect sunny days is especially hard, given that some of those best days occur right after the worst days. The market is volatile and jumping in and out of it has its costs.
I have been speaking a lot to clients about another timing issue recently, with the US equity market. The S&P 500 valuations cannot be considered cheap, and the US economy is indeed at the later part of the cycle, so a valid question is when to start reducing exposure to the US. The problem with exiting the US equity market too soon is that investors may leave quite a lot of returns on the table.
Starting with the crash of 1929, there have been 10 S&P 500 bear markets (declines of more than 20 per cent). Of the 10, eight have occurred at the time of a US recession. Each of the bear markets were preceded by large gains in the equity market, essentially significant rises before the falls. This week’s chart shows that the returns before the peaks are not to be missed, and in fact the median return 12 months before these peaks is 27 per cent in US dollar terms, or 39 per cent for the two-year period.
What it also shows us is that the current bull market – while it has lasted longer and produced stronger returns than average – is not unusual on either of these metrics relative to historical levels. In fact, of the 10 US bull markets since the 1930s, three returned significantly more than the current bull market, and two were significantly longer. In other words, this rally may well look extended now, but it could still have much further to run if it comes close to replicating either of the periods from 1949-1961 or 1987-2000.
