Bumps in the road
In the light of recent volatility, Geoff MacDonald of EdgePoint stresses that market falls should not be feared by long-term investors.
From 1980 to 2014, the annual returns for the S&P 500 Index have been positive in all but seven years, with one year of zero returns. That’s 27 out of 35 years that have been positive despite average intra-year declines of over 14%. In every year but one there has been a decline of at least 5% at some point during the year. There are even instances where the year saw double-digit intra-year drops yet still ended with positive double-digit returns.
Why is this important for investors to know? With intra-year declines averaging 14%, periods of significant market declines evidently happen frequently. But given that we’ve still seen strong long-term equity performance over the past 35 years, history gives us the confidence to say that when sell-offs do happen, even big ones, investors shouldn’t panic.
S&P 500 intra-year market declines and calendar year returns
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management; data to 25 August 2015. Returns are based on a price index only and do not include dividends. Intra-year drops refers to the largest market drops from peak to trough during the year. Returns shown are calendar year returns from 1980 to 2014, excluding 2015 which is year-to-date.
As portfolio managers, we actually welcome downturns. We don’t view volatility as risk, rather as opportunity. Volatility doesn’t hinder our long-term performance. If anything, it helps it. Volatility is the friend of the investor who knows the value of a business and the enemy of the investor who doesn’t. In other words, if you know the value of a business, short-term fluctuations in its stock price won’t keep you up at night.
In fact, market turbulence often presents us with opportunities to buy a business for less than what we think it’s worth. It’s our job to know the value of a business and to capitalise on that volatility. So when the share price falls, we buy it. When the market panics, we try to add value by buying businesses that can grow at prices where we think we’re getting that growth for free. Historically, we’ve added material value for our investors by capitalising on periods of volatility.
Unfortunately, most people see volatility as a risk, but volatility is simply the bumps in the road on your journey. You can’t invest in the stock market and think for a minute that you're going to go straight up. But for some reason, that’s the expectation of some investors. The lesson here is that volatility is not an ‘if’ but a ‘when’ and it’s what we do when it happens that really matters. If you don’t sell, you should equate it with opportunity and not financial loss.
Geoff MacDonald of EdgePoint is a co-manager of the St. James’s Place Global Equity fund. The opinions expressed are those of Geoff MacDonald and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.
Please be aware that past performance is not indicative of future performance. The value of an investment with St. James’s Place may fall as well as rise. You may get back less than you invested. Returns on equities cannot be guaranteed.