Hardly a day goes by without hearing or seeing that the current bull market will come to an end. The arguments are compelling; if we look at history we are in the longest bull market in modern times:
‘49 – ’56: 86 months
‘74 – ‘80: 74 months
‘82 – ‘87: 60 months
‘90 – ’00: 114 months
‘09 – ‘18: 115 months
Many of us remember the crashes of 1987, 2000 and 2008. The latter is freshest in our memories, with tumbling markets and a feeling of total meltdown. Since 2013, there have been at least 11 warnings that a crash is again on its way as per some market commentators. But even they can’t agree; with guesses of a market correction ranging anywhere between 30% and 87%. Interestingly at some point one of them will be right.
But I would argue that although it is healthy to respect market corrections, we shouldn’t necessarily fear them.
The last bear market ran for 515 days from 2007 to 2009 and saw the S&P 500 fall 57.6%. The subsequent bull market has now run for 115 months; the argument many use is that based on recent history, past indicators show that we have perhaps two years to run before we hit the next bear market.
The problem with this is two-fold; firstly, most bull markets are driven by underlying fundamentals, if we consider these, they have only been in place for the last two to three years (for example, it is only in the last couple years that we have seen growth from the European union etc). Secondly, there are factors which now distort data from the past. We are in a new kind of industrial revolution (technological improvements), the growth and dominance of developing economies and the unknown impact of QE.
If you try to model these factors, then you quickly discover that it is impossible to guess when the current bull market will come to an end. In this environment it is a “job” for people to spread fear and confusion because that is what they are paid to do. Our argument is that it is not wrong to be fearful, (that it is healthy to be aware of potential corrections) but don’t allow it to consume us.
What is a correction?
With the returns we saw in 2016 and 2017 many forget that we have already had corrections. This is seen as a fall of more than 10% but less than 20%. The consensus says it is unhealthy to see markets only rise but this is blinkered thinking, because people forget that markets fall, and when they do the pain of a falling market is greater.
In August/September 2015, January/February 2016 and January/February/March 2018 we saw market corrections. 2015 ended positively, and potentially 2018 will be similar for investors. 2016 could well have been the same as 2015 and (likely) 2018, had it not been for Brexit and the collapse of sterling which inflated returns.
Market movements are part of the investment process. If we have a repeat of 2008 then it is worth adding that at the end of a bear market, there are normally significant market gains. It can feel uncomfortable in the midst of such an event, but we just need to hold on.
When should we invest?
We recently met with a fund manager, and he explained when it comes to investing there are two points on which to focus: the entry and the exit. What happens in between those points doesn’t matter, it is just noise.
Warren Buffett was once asked how long people should stay in the market to which he replied “forever”.
We have used this example many times but research from Fidelity in 2012 demonstrated that investing in the market over the previous 10-years would have returned 68.96%. Being out of the market and missing the best ten days delivered a negative return of -4.64% and missing the best 30 days delivered a negative return of -49.08%.
In summary, investing is more about time in the market than timing the market. If we try to guess when we should invest or when we should leave the market, we are more than likely to miss the best parts of the markets.
We are hard wired to be fearful; this can be positive or negative it depends on how we use it. The reality is that over time markets will rise but there will be periods when they are negative. Corrections happen on a frequent basis and not all of these lead to a bear market. If one arises they do not tend to last very long and when they do end, normally the following 12-months produce significant returns.
Note: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.