Taking comfort from history
Mr Podmore, history teacher and ace badminton coach at my secondary school, used to tell me that I would, one day, take comfort from history.
He also told me that “History doesn’t repeat itself, but it often rhymes”. It’s a great line, and I bet Mark Twain wishes he had said it!
We are now officially in a bear market for shares (so-called because bears attack their prey by swiping their claws downward), as shares have lost more than 20% of their value even after yesterday’s swing upwards.
Many investors are, naturally, worried by the volatility which their retirement funds and investments are experiencing.
The bear market has also reminded me that I’ve been in the financial planning business for over 30 years. I’ve been able to reminisce about stockmarket history with some of my clients and colleagues.
Stockmarket history does provide us with some reassurance.
In essence, I have been through periods which have felt similar to the current virus-inspired crash; times like the “Asian contagion”, the bursting of the tech bubble at the turn of the century and the banking crisis.
While the causes of each of these crises were different, the feelings they inspire are similar.
It’s worth looking at some of the previous crises, as they give us a guide to what has happened in the past. They also offer an indication of what might happen in this crisis.
But remember that history doesn’t exactly repeat itself!
How Long do Bear Markets Last?
Bear (falling) markets tend to be much more short-lived than bull (rising) markets. Since 1900, the worst bear market in the UK has lasted two years nine months (following the great crash of 1929); in living memory, the 1970s oil shock triggered a bear market lasting two years seven months. The bursting of the tech bubble lasted two years, five months.
These were all extreme events – the average bear market lasts only one year four months (compared with the average, for a bull market, of 7 years 11 months).
How Deep are Bear Markets?
The FTSE All-Share Index came into being around 58 years ago, and since then, it has gone through 10 bear periods.
The average loss was 36.7% (at the close of business on 24th March 2020, the index had lost 30.3% from its high point on 17th January), so the loss so far has not been huge, relatively.
The worst loss was between 1972 and 1975, when the All-Share index lost 72.6% of its value, as a result of the oil shock.
Don’t forget that the FTSE All-Share Index ignores dividends, so, if you were reinvesting dividends, you would have experienced a slightly smaller loss.
How Long Does it Take to Recover?
The FTSE All-Share Index has always recovered from the losses it has suffered in the past.
The average recovery period (the time it takes to regain the previous high from the bottom of the bear market) is 648 days, which is less than 22 months.
However, the last two bear markets (the bursting of the tech bubble after 2000 and the banking crisis of 2007/8) have had the most extended recovery periods – 1,393 days (3 years, ten months) and 1,529 days (4 years two months) respectively.
If you had reinvested dividends, the recovery periods would, however, have been significantly shorter.
When Does it Matter?
If you held your shares throughout a bear market and waited for them to recover, you would, of course, have lost no money at all.
If you can be patient, you can happily ignore any bear market. That’s why we recommend two things for our clients:
That they have enough cash to see them through a predictable bear market.
If the average bear market lasts for 22 months, then it makes sense to hold a bit more cash than you need to see you through a period of at least 22 months. We generally suggest that our clients hold around three years’ worth of cash when they are withdrawing money from their portfolios.
That they diversify their portfolios.
Most of my longstanding clients will yawn as they hear me telling them that diversification is the answer to their investment question. But if you spread your portfolio across a variety of asset classes (such as bonds, property and overseas shares), you can expect to reduce not only the amount of time your personal bear market lasts, but also how deep it is, and how long it takes to recover. While we can’t say now how you should invest when this bear market comes to an end, we will likely be suggesting that you continue to diversify.
Does History Help Us?
I think it does. It helps us to understand the context of the bear market, while we are in it – is the current economic crisis as bad as the Great Depression, or the 1970s oil shock? It helps to understand that this isn’t the first time that a stock market crash like this has happened.
And it helps to remember that the UK stock market has always recovered from this sort of thing in the past.
If you are worried about your investments and the current market, do contact us – it may be that history might.