The COVID-19 pandemic has changed nearly every facet of daily life and shaken the faith of many investors. There’s no denying this pandemic is a huge societal challenge. Add that to existing long-term concerns—such as the challenge to the labour market posed by Baby Boomers retiring en masse or potential future job losses to automation—and it can be easy to lose hope. However, if you’re a long-term investor, history suggests you shouldn’t let negative events or fears keep you from investing. Markets don’t need everything to be perfect to continue rising over the long-term. It may seem callous, but stock markets have risen despite recessions, financial panics, natural disasters, wars and more. Patient and optimistic long-term investors have reaped the rewards. If you’re a long-term investor, here are a few reasons we believe staying optimistic is likely the right approach.
Reacting to uncertainty is risky
Today’s news is scary and unprecedented in many ways. Throughout recorded market history, we’ve never seen such widespread lockdowns globally in response to a pandemic. The massive uncertainty that accompanied the pandemic caused many to react emotionally, including those investors who sold out of stocks to avoid further losses. But doing so could have been a dangerous mistake, especially if you missed some or all of the subsequent market recovery.
Despite the novel nature of the coronavirus pandemic and societal response, long-term investors are often better off resisting the urge to change how they invest in uncertain times. A well-diversified investment strategy designed to meet your long-term financial goals can help you avoid knee-jerk reactions to short-term events. Such reactions could derail your strategy—increasing your risk of not reaching your goals.
For example, if you sold out of stocks when they started falling in February, you may have missed some downside leading to the market bottom in late March. Would you have known to re-invest then—when panic initially peaked—to capture the recovery? Many people who get out of the market during downturns wait for the dust to settle before they invest again. But stocks rebounded to all-time highs again, and the uncertainty surrounding coronavirus still hasn’t settled.
As Ken Fisher said earlier this year, “Clarity is often costly in investing.” Investors who deviated from their long-term investment strategies and waited for an “all-clear” signal likely missed some historic market up days during the current recovery.
Short-term fears are always present—in good times and bad
Today, many investors continue looking for reasons to be pessimistic, but such widespread scepticism is common early in bull markets. The upcoming US elections, rising US-China tensions and potentially rising inflation have all been noted as risks to the current market recovery. The present may seem uniquely perilous, but we believe this is because investors often see the past through rose-coloured lenses.
When looking back at previous bull markets, it may seem easy to have stayed invested, but fears are near constant, even in those seemingly good times. Investors who react to potential negatives by selling stocks risk missing out on future bull market returns.
Just look at the last bull market in the exhibit below an example. Fears cropped up constantly, yet the overarching bull market trend continued for over 10 years!
Exhibit 1: That Was No Easy Bull!
Source: FactSet, as of 1/30/2020. MSCI World Total Return (Net) from 31/12/2008 – 29/1/2020. Currency fluctuations between US dollar and Canadian dollar may result in higher or lower investment returns.
Many of these events seemed huge at the time and some even caused corrections—short, sentiment-driven market drops of -10% to -20%. But markets eventually continued their long-term bull market trend, reminding investors that markets can continue rising even if not everything is getting better. That’s not to say real societal issues don’t exist, but having faith that stocks will eventually continue their long-term rise can help you maintain a forward-looking perspective and avoid myopic investing mistakes.
Even during downturns, selling stocks may not be the answer for long-term investors. If you’re invested in stocks, then you likely require long-term portfolio growth to meet your financial goals. Since 1979, global stocks have averaged 8.8% annual returns—and that includes all bear markets![i] Investing in stocks for the long-term means enduring short-term volatility to capture long-term growth.
Long-term issues don’t sink markets
Whilst many people think long-term, widely watched trends—such as the continued loss of jobs to automation or the impacts of climate change—will drag down the stock market, Fisher Investments <Branch> believes this misunderstands how markets work.
Markets are forward looking, and Fisher Investments <Branch> believes markets price in likely outcomes for the next 3-to-30 months. So, if economic trouble seems likely over the next month or next year, markets will price in and reflect that future negativity now. However, with long-term trends, we believe the stock market is only concerned with potential market implications within that 3-to-30-month timeframe. That’s not to say issues don’t exist—just that they may not have an immediate stock market impact.
Further, many investors and financial media commonly make the mistake of projecting current trends into the distant future. Long-term projections are commonly used to model global population growth or resource consumption and potential challenges we may face 30 years out if current trends continues. In our view, however, such projections ignore our long history of innovation and adaptation, our track record as a species of continually improving daily life and avoiding worst-case scenarios.
A classic example of human ingenuity proving long-term forecasts wrong came at the turn of the 20th century. In 1900, long-term forecasts said New York City and London would soon be overrun with horse manure from horse-and-buggies. However, those projections didn’t—and couldn’t—account for the invention of the automobile, which inadvertently solved the manure problem and improved human mobility.
As challenges like COVID-19 take centre stage, there are immense opportunities for inventors, scientists and dreamers to come up with solutions to our biggest problems. Humans have shown great resiliency and creativity in dealing with our big problems in the past. We believe this should comfort the long-term investors who properly diversify their portfolios across companies representing every sector of the global economy. For those who don’t have sufficient capital to efficiently diversify using individual stocks, mutual funds or exchange-traded funds may be good options.
As an investor, you can’t expect to know how we’ll discover a vaccine for coronavirus or solve other long-term issues. But whilst others focus on the negatives, we believe long-term investors should have faith. Remember all the challenges we’ve overcome in the recent and distant past. Long-term investing is hard, and we currently face legitimate challenges. But humans will adjust, and the stock market and your portfolio may well benefit from your optimism and faith in stocks today.
[i] Source: FactSet, as of 11/12/2019. MSCI World Index annualised returns, 31/12/1969 – 29/11/2019. Currency fluctuations between US dollar and Canadian dollar may result in higher or lower investment returns.
Fisher Asset Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.
Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
This content was produced by Fisher Investments Canada. The Globe and Mail was not involved in its creation.