Bear markets can be unnerving times for investors, but history has shown playing the long game pays off.
When markets are down, investors naturally become nervous about the performance of their investment portfolio.
This discomfort is often compounded by murmurings of recession, economic drivers such as rising inflation, and conflicting opinions in the media.
We’re currently in the midst of a bear market – a downturn typically defined by securities falling 20 percent or more from the current high – emblematic of macroeconomic uncertainty that has no clear end point.
“We still have the scars of 2020 and vaccines and supply-chain disruptions … those creases were still being ironed out before the Russia-Ukraine situation became an issue, so that has certainly exacerbated it,” says Chris Wilson, an investment counsellor with RBC Wealth Management in the British Isles.
Wherever investors turn, the effects of geopolitics and inflation, coupled with policy responses, seem to be unavoidable. Wilson says it’s something that has come up in a lot of conversations with clients. “Bonds are reacting to interest rates, commodities in relation to inflation, and equities with regards to volatility.”
For high-net-worth individuals with significant cash reserves, inflation is outpacing interest-rate rises and eating away at purchasing power. But Wilson has also noticed a sense of poise amongst investors, which sets the current bear market apart from the frenzied tension of the 2008 global financial crisis. “Clients have certainly been calmer, in my experience,” he says. “Rather than frantic calls, clients are interested, they want to be educated and to know what we’re doing.” Indeed, a 2022 RBC Wealth Management survey of 600 UK-based HNWIs identified that 76 percent were in need of some form of guidance on how to manage their investments.
For Wilson, education is key to calming one’s nerves in a market downturn. It can turn feelings of helplessness into empowerment and confidence.
To understand the current market is to recognise that financial markets aren’t linear; they move through peaks and valleys. Historically, they’ve been resilient, balancing downturns with growth over the long term.
A May 2022 Investor Insights note from RBC Global Asset Management highlighted that between 2014 and 2019, we have experienced multiple days when the financial markets fell 10 percent or more – referred to as “drawdowns.” Even with more complex dips like the global financial crisis of 2008, when the drawdown hit nearly 45 percent at the worst of the crisis and recovery lasted several years, the return of investor confidence helped spark a decade-long period of growth.
Bear markets and recessions are part of a normal market cycle. According to data from Seeking Alpha , there have been 26 bear markets since 1928. On average, those bear markets have lasted 289 days – which, for a long-term investor, is a blip in their overall growth strategy.
In a lot of ways, downturns have a tendency to build the case for a long-term view, says Chris Matthews, managing director, RBC Wealth Management in the British Isles. Letting emotions drive you to take short-term gambles like pulling money out of the market during bear markets can be costly. “It’s that fight-or-flight … you’ve got-to-do-something feeling,” he says.
According to RBC Wealth Management research based on the S&P 500 Total Return Index, if you invested £10,000 in the S&P 500 from May 2002 to April 2022, and stayed invested, you’d be looking at a 9.1 percent annualised return.
Chart showing RBC Wealth Management research which indicates if you invested £10,000 in the S&P 500 from May 2002 to April 2022, and stayed invested, you’d be looking at a 9.1 percent annualised return.
“If you were out of the market on just the best 10 days, your annualised return would be 4.9 percent, and if you were out for the best 20 days, you’d have a 2.2 percent annualised return,” he says. “Generally, the biggest bounce days are right on the back of when the news is at its worst, when nobody is expecting it to get better … those are the days when you want to make sure you’re in the market.”
That being said, Matthews says “timing the market is the toughest thing to do” – especially when the market is impossible to predict. If you have lost your nerve or made a knee-jerk decision because you feel like you’re doing nothing, “you’re going to miss market rallies.” It’s better to focus on what you can control.
Moments of uncertainty create an opportunity to revisit your plan, says Wilson. “Check in on your broader financial position and make sure you’re on the right track, accepting that there’ll be a lot of volatility along the way and this is one of those lower moments.”
He says part of the wealth planning discovery process is asking clients questions to really understand their risk appetites – for example, how would they react if markets were down 15 percent, 35 percent or 50 percent? And what proportion of their wealth would be impacted? “It’s goals-based investing with a purpose,” he says. “And in that process, it’s discovering not just your ability to take risk, but your willingness to maximise the return for that level of risk.”
Matthews agrees. “These times aren’t comfortable, but what they really do is shine a light on whether or not you’re in the right strategy,” he says. “If the markets are down 20 percent and that’s a big surprise that causes you high levels of anxiety, what that shows is you may not have been in the right strategy for your risk profile to start with.”
He says the next step would be to bring those feelings to your investment manager to revise your approach, find strategic opportunities and rebalance your asset allocation.
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Fundamentally, whether it’s a drawdown or a momentary spike, investors who have managed to hold their position and take a long-term view have been rewarded with growth. Since 2010, there have been four growth scares – where the economy narrowly dodges a recession. Once the market hit bottom, the S&P 500 rallied by an average of almost 30 percent 12 months later.
Matthews is quick to acknowledge that understanding market context comes easier to clients who have seen their wealth go through these cycles. But he also points out for the next generation of high-net-worth investors who have entered the market during a period of growth, the latest downturn is obviously unnerving. “They’ve only seen things go up and up,” he says. “Going through things like COVID-19 shows you the world can change really quickly.”
Regardless of what is driving the negative sentiments and bear market – whether that’s geopolitics, inflation or a public health crisis – Matthews says his approach remains the same: “We deal with data and we think in line with the client’s priorities and long-term objectives.”
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