On many occasions in the last c.100 years, leading stock markets have suffered significant pullbacks for various reasons be they technical, economic or fundamental, but almost invariably equity markets have recovered their poise within a time-frame of five years, and often much less. Analysis shows that long-term investors who remain calm, do not attempt to ‘time’ markets and stay invested will often be rewarded with high-single-digit compound annual returns.
Understandably, investors are currently nervous given the range of uncertainties from the Ukraine crisis and its aftermath to rising inflation. According to a recent Reuters poll, investors are cautious. Many global fund managers and large endowments have been reducing their exposure to equities in favour of sovereign bonds and cash. It’s a strategy that we find ourselves at odds with, and we said as much in the article that accompanied the poll’s result. In an inflationary environment, equities are the only large, liquid and accessible asset class which can generate significant real returns. The market correction means that many high-quality, large companies are at very attractive prices, down 20% or more in some cases. That is why any weakness is as much an opportunity for us, as for any long-term investors.
We prefer to take a step back and focus on the long term and company-specific fundamentals. There is also another powerful reason why investors should not let short-term noise interfere with their investment strategy. History tells us that equities generate meaningful compound returns if you remain patient and invest for long periods. This phenomenon is illustrated by the Return Triangle from Deutsches Aktieninstiut. It neatly demonstrates that no matter how bad a crisis gets, equity investors that stay the course will reap the rewards over time.
The Aktieninstiut’s original model is based on the DAX, the German stock market index, but we have adopted its model to show the compounded returns of the S&P 500 since 1928, an index that is more relevant for global investors such as ourselves.