Larry Elliott, 9th August 2024 for The Guardian
Headlines such as the above abounded for the first week of August 2024 as markets around the world dropped suddenly and violently, many of us were contemplating dropping suddenly and violently on to a sun lounger with a cocktail. Headlines likes this are not something that encourage relaxation, are they!
But should we care? Certainly not if we are two plus cocktails in. But, should we care anyway?
Not if we are following our general principles, which are:
We are goal-focused, plan-driven, long-term equity investors. Our portfolios are derived from and driven by your most cherished lifetime financial goals, not from any view of the economy or the markets.
We do not believe the economy can be consistently forecast, nor the markets consistently timed. We do not believe it is possible to gain any advantage by going in and out of the markets, regardless of current conditions.
We therefore believe that the most efficient method of capturing the full premium compound return of equities is by remaining fully invested all the time.
We are thus prepared to ride out the equity market's frequent, often significant but historically always temporary declines. We believe that even during such trying episodes, our reinvested dividends will be buying more lower-priced shares—and that the power of equity compounding will be continuing, to our long-term benefit.
With general principles, a cocktail or both in hand, we would not be too worried about an event where there was a sudden decline in stock market values. But here is an excerpt from an email of someone that was worried:
Hi Steve, Hope you are well (then a story about their holiday that I have deleted so people can’t identify who this is!) I’m not sure how much of the £500k has been invested so far but reading the news and the global drop in stock markets should we hold off investing any more until the markets settle?
This client has been with Lucent for well over 10 years and we have consistently said the same message to them as is in our general principles above. But, when headlines such as the one illustrated are screaming our impending disaster, we will all get a little fidgety! For it speaks to our fears that ‘this time is different’ or that it is more important to take a more cautious approach when we are close to retirement / just retired / near or going through any other life event.
As this was the case, we agreed to invest the money into the market in 3 instalments over a few months, in case there were some shocks. If you look at the historical data, this doesn’t make much difference either way. It’s a coin toss as to what will be better. Although there is ever such a slight chance investing all at once is best, due to accruing more dividends that way. But, it certainly makes people feel a bit better, feeding the money in like this. Our preference is for people to invest all at once, but, if you’re worried about it, it’s ok to spread it out. Better to feel better than to worry, is our viewpoint.
The next instalment to be invested was around the 12th of August. I replied to this email that we should stick to the reasons we are investing this amount and the reason we spread investment over a few months was in case there were any drops, you could take advantage by buying more assets at a lower price. Indeed, it would be a right result!
That’s great Steve, The wife says if you’re happy, she’s happy 😀
So, we carried on as planned. Like their initial email, it is best for them to concentrate on their holidays rather than worry about this. But let’s take a close look at what actually happened in markets to evoke this fear amongst a client and journalists around the world!
In this, we will use the MSCI World Index to show the value of shares over the past year and then look at what has happened:
From the above chart you can see there has been a 20% growth in the MSCI World Index in the past 12 months
In the first 6 months of 2024, there was 12.69% of growth.
There are a number of reasons for this growth:
Inflation declining meaning an interest rate reduction expectation meant markets went up as interest rates going down is positive for company earnings generally.
The Magnificent 7 (Apple, Microsoft, Alphabet, Amazon, Tesla, Meta, and Nvidia) has seen incredibly large growth and this has been a large part of world growth, on the back of Artificial Intelligence and it’s positive effects on company earnings it is expected to have.
However, in July and August 2024, continuing geopolitical fears such as Ukraine / Russia and in the Middle East combined with an Interest Rate increase in Japan to counteract higher than expected inflation caused a 12% drop in the Japanese Nikkei index.
This then caused concern around the world and ripple effects meaning there were large drops in European and US stock markets. By the 25th of July the global market had lost 2.5% and by the end of July, in just a month, the global stock market had lost only 0.06%.
Then, came the most dramatic events in the first week of August...
That’s right, a loss of 4.72%! Remember, the market is up for the year by 12.69% to the end of June, so just under 8% growth year to date is… Brilliant! Does it deserve those newspaper headlines when nothing is really happening?
What has happened since?
It’s all come back! Quite quickly, it wasn’t the start of a longer-term event, but even longer-term downward events only last on average 3 years until they are back to where they were originally. Three years is not much on the rest of your life is it? It’s a mere blink. I hope to spend 3 years of my life drinking cocktails if all the time was put together. And that’s right, I wouldn’t remember much of that time either.
If we zoom out, then over the past 3 years, it’s barely noticeable:
And over 10 years...
And so over time, as the wobbles, downers and rebounds all even out, the dividends distributed from the company earnings buy more shares when the share price falls and so wealth grows.
What is important about this is these charts, when you spread them out, look very similar to a compound interest chart. To prove this to you, below are charts over various time periods of 20, 30 and 40 years, which for most people, will be the time you have in retirement, depending on how optimistic / pessimistic you are about your life expectancy.
In red, is a 10% compound interest rate and Green is 11%. The Blue is the MSCI World Index. You will see that the global economy seems to have been compounding at 10% a year for a very long time.
20 years...
30 years...
40 years...
What is the base cause of this?
People want to improve their life. I don’t know about you, but I think we only have one life. I want to make mine the best it can be. I want to help our clients and the people I work with have a brilliant life too and I want to have a good time as I go.
How do I do that?
I go to work. I try hard to earn the money I need to earn to keep my wife off my back, to do the things I enjoy, visit the places I want to go to and help the cause I care about. Sometimes, I want to buy an artisan scotch egg and ponder the merits of black pudding instead of sausage meat encasing the egg. My mind is still not made up.
I like my job. But I also like not doing it too! So, I try to get better at it, become more efficient etc so I can go home and do the things I want. Like eat the artisan scotch egg.
These are the things that drive growth in company values. If you want money, you need to work for a company of some sort. Most / everyone does work for a company of sorts. If you want to spend less time there, you need to become more efficient. Combine these two together, as companies do, and you get growth from billions of people trying to improve their lives. If you’re a shareholder of the company, you get a share of those profits. And so it continues…
This article does not constitute financial advice. We recommend that you speak to a qualified financial adviser for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.
About the author
Steve Rowe is the CEO and Founder of Lucent Financial Planning, an award-winning provider of financial services to individuals and business owners in the Midlands region. We want to be the Financial Advisers that change your life, not just the financial adviser that changes your ISA.
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