This too shall pass

As you may be aware the media has been making a lot of noise about the recent volatility in the stock market. The global stock market is down by circa 10% from the peak. This volatility is normal, expected, and happens usually ever year – the average annual downturn is 14% per annum. To re-iterate this is normal.

We understand this volatility is painful for investors. We make money in percentages but feel the pain of temporary declines in euro terms. On a notional €1m we should expect to see it fall by 14% or €140,000 euro using the average annual downturn as an example, sometimes in bear markets it is a lot more than that. However, the prize for putting up with these downturns has historically been 10% per annum. If equity markets didn’t go up and down like this, they wouldn’t have the return they historically have done (they would look more like bonds – lower volatility but materially lower returns). It’s a package – good returns come with volatility – you can’t have one without the other.

As a firm we allocate assets based on an individual’s financial structure. We intentionally accept certain risks (investing in global equities to drive long term returns) and mitigate others (by maintaining reserves in the likes of cash, money market funds and bonds).

So, what should I do?

Precisely nothing. If your financial plan hasn’t changed then neither should your asset allocation. The absolute worst thing you could do would be to sell and wait to buy back in. It is next to impossible to time the market consistently. We don’t know when markets are going to go down or go back up. Between 1995 and 2024 if you missed the best 10 days in the stock market (using the S&P 500 as an example) your return would be down by 54%, and interestingly, circa 50% of the best 50 days in the stock market come in bear markets (when the market is down 20% or more). It’s not just a case of being out of the market in the bad times and getting back in during the good times – that won’t work.

Try and tune out the noise and do nothing. This too shall pass.