Do market falls equal negative annual returns?

Do market falls equal negative annual returns?

Photo by Troy Williams on Unsplash

Looking back at 2020, it would’ve taken a brave person to have predicted at the end of March a positive return for equity markets in the calendar year 2020.  With equity markets down around 30% during the first quarter, not many investors or ‘experts’ would’ve confidently said that returns would be positive by the end of December.  However, as we now know with the considerable benefit of hindsight, that’s precisely what happened in most equity markets.

The MSCI All Countries index in dollar terms, which can be used as a good indicator of global equity market returns, showed a return from the start of 2020 to the 20th March 2020 (the lowest or close to the lowest point in the year) of around -30%.  For most investors, this probably resulted in feeling uncomfortable and created some worry about what was next.  

This same index in sterling terms, which is appropriate for most UK investors, from 1st January 2020 to 30th April 2020, showed a return of -9.1%.  However, again in sterling terms, the same index returned 10.8% by the end of 2020 for the whole year.

So what does this tell us?  Was the fast recovery in 2020 a one-off event not witnessed very often, or was this just another part of the volatility we should expect from equity markets?

The first thing to consider is that just looking at 2020 doesn’t tell us very much apart from what we already know, which is that it was an interesting year!  Some would say it was a unique year.  In certain aspects, yes, it was a unique year, but it wasn’t as unique as you might think when looking at equity market returns.  

If we consider other calendar years, it’s fairly common for considerable equity market falls to occur during a year but still to be positive for returns over the whole year.  For example, if we look at the US equity market, around 16 of the last 20 years have had in year market falls of varying magnitudes but they’ve finished the year with positive returns. 

This indicates that 2020 wasn’t that unique and, despite some things I read in March 2020, ‘now’ wasn’t different.  You could argue that many things in 2020 were different, but the aggregate of all investors actions (the market) acted in a similar way to how it’s behaved in the past. 

Falls during years are unpredictable and can’t be consistently timed, but if you hold your nerve and stay invested, positive returns do come back eventually.  Suppose you were lucky enough to invest new funds during the downturn or had a rebalancing approach that triggered a sale of defensive assets and the purchase of more equities (growth assets) during these periods.  In that case, you might experience higher returns.  This isn’t always possible, but staying the course and not worrying about short-term movements, positive or negative, is possible and is a sensible approach to take in markets.

Equally, even though we tend to focus on arbitrary periods of time, like a calendar year, we should be looking at much longer periods anyway and focusing on why and what we’re investing for.

Unfortunately, volatility is a normal part of investing.  The higher positive returns that investors receive from equities over the long term are the compensation for taking on the risk and living with the volatility.  Risk and return are related, so if you want a higher long-term return than, say, a cash like investment, you need to take more risk, which will mean a bumpy ride.      

Bumps in the road might be scary at the time, but they shouldn’t be surprising.  A long-term focus based on your financial and lifestyle goals can help you keep perspective and stay the course.

Cheers

Charles

This blog is intended for information purposes only and no action should be taken or refrained from being taken as a consequence without consulting a suitably qualified and regulated person.  Your capital is at risk when investing.  Past performance is not a reliable indicator of future results.