Is this downturn different?

Market drops are nerve-wracking. The questions come quickly: why didn’t I see this coming? How much worse is it going to get? Is someone seeing something that I’m not?

And maybe, the most gnawing thought for investors, even for those who have been in the market for decades, is whether this time it’s different.

From 2002 to 2022, the market has fallen by more than 10% in more than half the years*. If we stretch back to 1954, a decline of 10% or more has happened about every 30 months, and the average recovery time has been 234 days**.

Hindsight is always 20/20. And when the numbers are laid out like this, it’s easier to feel more comfortable than watching the more short-term market movements. While now it seems obvious that we would recover from the COVID-19 pandemic dips and people would go back to normal life, or that Trussonomics wouldn't last, it’s harder to have that clarity at the time.

We can’t look forward, but we can look back. And sometimes there is comfort in gathering this context and looking at history.

When the market falls, there’s sometimes a very clear reason. In 2022, markets around the globe dropped as we faced the repercussions of COVID-19. In 2008, the notorious housing market crash triggered the Global Financial Crisis. Other times, the reason the market is deteriorating takes a little more digging or could be a combination of issues.

Market recoveries

But here’s a note of positivity: historically, the global market has always picked back up, even if it takes some time. The MSCI World Index hit a record high earlier this year and, even with the recent drop, in the past five years the index is up 94%, as of 7 April.

The FTSE 100, which has been out of favour with investors in recent years, has also still managed to recover from it’s previous falls. It had its most recent bear market (where a stock index drops by 20% or more) in 2020 as the pandemic began. Over a period of 66 days, the market fell 34.9%, but less than three years later, by 6 January 2023, the market had recovered its value.

But what about a more dramatic drop, like the Global Financial Crisis? In this case, the bear market for the FTSE 100 began in June 2007 and lasted for nearly two years, to March of 2009, losing 47.8% of its value. This time, the market took just under five years to recover. But in the long term, investors still ended up ahead.

If you’re looking for the last time geopolitical conflict caused a Bear’ market for the FTSE 100, perhaps the best reference point would be Black Monday, when a market panic amid global conflict and attempts to maintain currency strength led to the Dow Jones Industrial Average falling 22.6% in one trading session.

The FTSE 100 fall on this occasion lasted for 116 days, with a 35.9% total decline over that period. But just over two years later, the market popped back up to its previous highs. This was the beginning of a ‘Bull’ market for the index, which would see the price grow 294.8% in just over a decade.

Depending on the downturn, this meant you had to put an extended bit of faith in the markets to allow your investments to climb back to their previous levels. But, unless you needed to withdraw your investments during this time, riding out the wave paid off, and resulted in further growth in the long term.

Source: AJ Bell data

Should I sell out?

It’s very tempting to try to save yourself from the stress of a market fall by taking your money out and keeping it safe in cash. Or to think you should switch to cash and tactically wait for the right time to re-enter markets. In reality, markets are extremely difficult to time. Sometimes, as a group of investors pull their money out, causing the market to drop, a second group of investors will then see the market at an attractive price and decide to buy in, buoying the price right back up. This happens often: many of the best days for the market in a year come within two weeks of the worst ones.

If you sell out, and you don’t jump back in before those upswing days, the losses can be significant. Research from iShares found that if an investor put $10,000 into the S&P 500 20 years ago, they would have made $71,750. But what if they missed out on the best day of the market? Their return drops to $45,318. If they missed the best 25 days, the value of their investment would be just $15,889.

When things start to go wrong, the immediate reaction may be that it’s time to act. But historically, timing this correctly has been as much a game of luck as one of skill.

What about stocks and funds?

It’s important to note that when discussing market recoveries, this refers to a broad collection of hundreds or thousands of holdings. Even if some of these companies fail, others tend to succeed, creating a net positive in the market.

Investing in individual stocks or funds that have a more concentrated group of holdings have less of a clear history of recovery. Here, context can play an important role. During COVID-19, companies in the travel industry suffered due to lockdowns. This made for severe market drops for companies such as EasyJet and Ryanair, but as travel resumed, the stocks shot back up.

Even high-conviction professional fund managers hold between 25 and 30 stocks in their portfolios, because they know that there is value in not putting all your eggs in one basket. This, however, is a lot of companies for a DIY investor to keep track of. Holding active funds, which typically contain 50-100 stocks, can be an easy way to spread out investments so they don’t rely too heavily on a single holding. Passive funds can achieve this goal on a much broader scale, by investing in an entire index, which can contain thousands of companies.

This spread of investments allows a degree of protection from market drops. Perhaps your emerging markets fund takes a tumble for the quarter, but your UK-focused fund has a nice growth spurt. This can help your money perform on a more even keel and decrease anxiety around investing.

The psychology of the market

One of the most common phenomena investors experience is a fear of missing out. Investments are one of the only things we purchase where we take the approach that if prices are rising, we are desperate to buy, and when things become less expensive, we are much less interested.

Emotions do not tend to be a good judge of markets, and even the most experienced investors aren’t immune from feelings playing into decision making. Simply, no one is going to get it right all of the time. And sometimes in investing, the best decision can be sitting on your hands and making no decision at all.

*Source: Charles Schwab

**Source: Capital Group