Four keys for calm and learning how to invest in times of crisis
The latest Russian invasion of Ukraine has large fluctuations in the market experts are advised to exercise caution in the current time when more than ever before investing. We are discussing the four facts that can help maintain calm in this scenario and not to make rash decisions:
Investing in the stock market is fraught with danger in the short term, but the risk is less in the long term
Based on nearly 100 years of data on the US stock market behavior, we discovered that if invested for only one month, we will lose an estimated 40% of the capital on the average basis of inflation, and this is what happened in 460 of 1,153 months in our analysis.
However, if the investment has continued for a more extended period result has become more positive. For example, during the 12 months, the capital might have lost less than 30% slightly. It is important to note that the year is not a short time still when it comes to the stock market. In contrast, over five years, this figure drops to 23%. In 10 years of 14%. Our analysis did not include the 20-year period in which the stock market suffered losses based on inflation.
Indeed, you can not exclude the possibility of losing money in the long term completely. However, it is rare.
In contrast, while liquid money may seem more secure, the chances of diminished value are because of much greater inflation. The last time overcome the criticism on inflation in the five years from February 2006 to February 2011, but at the moment we do not believe that this trend will change.
The drop was recorded by more than 10% in most years, but the long-term performance was strong.
On Thursday of last week, global stock markets fell by 10% from their peak, and on Friday recovered but fell again earlier this week.
This may look like the ratio of 10% significantly reduced, but they are widespread. IN MOST YEARS, the US market recorded a 10% drop in at least 28 years during the last 50 calendar years. The past decade included the years 2012, 2015.2016, 2018.2020.
Despite these obstacles on the way, the value of the US stock market rose on average by 11% annually over the fifty years of this. Thus, in the securities market, the investor shall expose himself to the risk of short-term for long-term returns.
Selling after the significant decline could cost the investor to allocate it to retirement.
Although the market did not fall excessively so far, it can be excluded more volatility, and risk is not harmful. If this happens, it may be tempting to sell the stock and speed up getting money.
However, our analysis indicates that, historically, it was possible to be the worst financial decision taken by the investor. Doing this certainly means it will take a long time to make up for losses.
For example, the investors who have converted to cash in 1929, after the collapse of the first 25% of the Great Depression, waited until 1963 to get their money back for the same value. Instead, if investors remained in the market, they could recover their money early in 1945. Notably, the stock market ended up down by more than 80% during this crisis. So perhaps the shift to cash may avoid the worst losses during the stage of collapse but later turned out that so far the worst long-term strategy.
Similarly, investors who have converted to cash in 2001, after the collapse of 25% in the crisis of the failure of technology companies, to see that to this day have not recovered fully from their portfolio losses.
In short, it was out of the market, and the use of liquid cash after the significant decline is a negative return for the portfolio in the long term.
Moments reached the highest level’s uncertainty and were better than expected for the stock market.
It recently led to the escalating tensions between Russia and Ukraine to raise the Fix index, the “fear gauge” in the stock market. The Fix measures the amount of volatility that traders expect from the S&P 500 over the next thirty days.
Thus, the index has risen over the past few days to 32, which is much higher than the average since 1990 and is 19, much higher than its level at the beginning of the year, 17. So it’s not hard to imagine a scenario moving this indicator to its highest level in the coming days following the events.
However, it is historical rather than the time of sale. Most receptive investors achieve the most volatile periods and Oouselt levels of uncertainty to the peak to risk better returns. In fact, on average, achieved the S & P 500 average return for 12 months by more than 15% when the Fix index was between 28.7 and 33.5. And more than 26% when it exceeded 33.5.
We also looked at the change in strategy, i.e., the sale of shares (S & P decision 500) and switch to daily liquid money every time enters the Fix this upper part, and then returned to investing in stocks when prices fell again. It was possible to have the worst performance of the approach of the strategy to continue to invest in stocks continuously margin of 2.3% annually since 1991 (7.6% per annum compared to 9.9% per annum, excluding the cost of fees and account).
The investment was $ 100 invested in the portfolio in January 1990. The continuing weakness equals the value of $ 100 invested in the portfolio chosen to change the strategy.
As with all investments, what happened in the past is not necessarily evidence of what will happen in the future, but history points out that the periods of fear reaching their peak, such as those we are currently witnessing, were better than expected for stock investment.