Back To The Future
Source: New York Times
The two pictures above are of the same place. The one on the left was taken after a savage forest fire. The one on the right is two years later. It’s amazing how quickly the forest regenerated. When things seem bleak, like they do now, remember that they will eventually pass and better times will arrive.
We are certainly living through very uncertain, worrying and scary times. Most of us have relatives or friends who are in one of the vulnerable groups, for whom getting access to critical care could be the difference between life and death. Let’s hope that the current policies will help manage healthcare resources efficiently.
My own view is that it will probably take a lot longer to get control of the situation and it’s entirely possible we could experience a second outbreak if restrictions are relaxed too quickly. As economic activity slows to a crawl the immediate impact is job losses, rising personal and business bankruptcies and more government debt.
Morningstar, the investment group, expects economic activity to resume in early 2021. Whether that turns out to be the case or not is anyone’s guess, but expect 2020 to be a very tough year emotionally, financially and physically. But when, and it is when, not if, world governments get ahead of the virus, economic activity and growth will return and people will start to rebuild their lives.
If you hold investments, perhaps via an ISA or pension account, you might be looking at falls in value since last month of up to 40% if you hold purely equities. Most people don’t hold only equities and so their falls will be lower.
Any big fall in your investments be very scary and you might feel so uncomfortable that you want to bail out or stop regular investing. But before you do, it’s worth looking at past crises and the impact they had on financial assets.
Let’s look at what happened to stockmarkets in the 1970s.
In 1973 a combination of factors, including a war in the Middle East that caused a spike in the price of oil, hit the world economy. Let’s turn this into real numbers to illustrate the situation based on an investment of £100,000 entirely in UK equities:
End of 1972 - £100,000
End of 1973 - £73,000
End of 1974 - £36,208
End of 1975 - £95,368
End of 1976 - £97,847
End of 1977 - £145,498
Source: Based on annual returns from Dimensional UK Market Index, excluding charges and taxes
As you can see the UK stock market produced massive negative returns for two years and the nominal (excluding inflation) value only started to turn positive in 1977, and it took until 1982 to regain its purchasing power.
Let’s think about that for a moment.
You went from £100,000, to a little over £36,000 in 2 years!
You then had to sit it out and wait for another three years until you got back to what you had at the end of 1972 and another five years to have the same purchasing power.
That’s ten years!
Warren Buffett said “The stock market is designed to transfer money from the active to the patient.”
The late 1972 investor had to be very patient to come out ahead. But many bailed out and sat in cash, thinking that was the safe thing to do. But they never recovered their previous losses. When recovery comes, it comes in short bursts and can be extreme.
So now you can see why I always say that you need a minimum time horizon of ten years to even think about investing in shares.
Below is an interesting chart from Morningstar showing the returns from a US based balanced portfolio after all the major crises since 1987.
I have no more idea than anyone else how this health crisis will pan out, but I do know that we will get on top of it and eventually life will resume some form of normality and we won’t all be holed up at home.
No doubt some things will be different - working more from home, less blaise spending, better hand hygiene! - but people will still work, play, consume, communicate, travel, create and socialise. And when they do, the great companies of the world will serve them, generate a profit and reward the patient investor. Just make sure that is you.