Investment markets have been pretty good to those investing in the global equity markets over the past couple of years. After a period of sideways markets (let’s just say flat) and soaring inflation, the S&P 500 (the world’s premier stock market in the opinion of many), rose by 24% in 2023 and another 23% in 2024. Not everyone is invested completely in the S&P 500 (for a number of reasons), so not everyone will have gotten these returns. However, if you had been invested into a globally diversified portfolio with exposure to 100% equities then you could have received returns of c. 15 – 18% in 2024 and 10 – 15% in 2023.
Most significantly, the last two years saw no extended periods of significant declines.
In 2023, the largest decline was -10% between July and October (in terms of the S&P 500). In 2024, the worst was a 21-day decline of only -8% between July and August (again in terms of the S&P 500).
While this was a welcome respite from the normal market rhythm, the financial media would likely have been dismayed! Bad news sells, while positive stock market returns do not it seems! More seriously, there’s a danger that investors will forget the important lessons learnt from past declines.
To prepare you for the possibility of more significant declines in the coming year, we outline a few points below that you should keep in mind when others are losing theirs.
What You Should Know
It is a well-known feature of the stock market that values do not move in a straight line but instead fluctuate up and down while keeping to a generally upward trend over time. We refer to this as “volatility.” Dale often compares volatility to rollercoasters, comparing the Barry’s Big Dipper to the Crazy Caterpillar – two rollercoasters, one “scarier” or more volatile than the other.
*Image borrowed from Humans Under Management
A market correction is defined as a 10% drawdown from a previous market high. While it may sound like a significant number, these events occur far more frequently than most investors believe. Indeed, they come around as often as your birthday, with years like 2024 being the exception.
Since the turn of the century, the average annual decline has been approximately -16%. While this may surprise you, it’s worth noting that about three in every four years still ended with a positive return.
We also know from market history that we expect a decline of more than -30% approximately every five years (on average), as we last experienced in 2020 in Covid. The market rebounded so quickly after this though, that portfolios produced close to a 10% return in that same year
How You Should React
We know that stock markets generally provide positive returns about three in every four years. The one negative year is what earns you the other three positive years. It’s the price of admission for profiting from the collective ingenuity of the hundreds of companies working for you while you sleep. We encourage you to see the temporary declines as the reason for the stock market’s permanent returns. You can’t have one without the other.
Unfortunately, we cannot consistently predict when these fluctuations will occur or when they will reverse. If we could, we wouldn’t need to work because we’d be rich! To be a successful long-term investor, one must accept this with humility.
Market declines will consistently occur throughout your investing life, and your mindset during these times is a choice that will shape your financial future. We advise you to confront them with confidence rather than fear while being mindful of the opportunities they present.
Time Heals
Ultimately, what happens in the next year is relatively unimportant to your 30-year plans. If you’re investing long-term, the odds are stacked in your favour. You’re almost guaranteed to win.
After two years of minimal volatility, if we experience a decline in the coming months, be encouraged that you are busy earning future returns. Additionally, if you’re still saving, declines are your best friend, allowing you to buy more units of shares at reduced prices (basically you are getting a discount – a sale if you will).
While we don’t know where the market will be at the end of 2025, we’re pretty confident about where it will be in 10 years: much higher. Time is the enemy of market declines, and most investors have plenty of time.
Don’t Be Put Off Investing Now
Some inexperienced investors will say to themselves, “I’m going to wait until the market stops going down.” This is very hard to do, and it will potentially cost you in terms of your returns.
The below graphic was produced by Visual Capitalist, which shows the impact of missing out on the best investing days, which quite often immediately followed the very worst. Look very closely at the 10 best days, they were all in 2008-09 (The Recession) or 2020 (Covid).
**Image and Research from The Visual Capitalist
If you want to have a word with either John or Dale, send them an email or give them a call. It’s during these more “scary” investment times when we understand you might be nervous or feeling unsure. You might remember our first few meetings with you when we warned you investments can go down as well as up, but for some that warning might have been several years ago.
So far, the news has made this year seem scarier than it has been, probably because it’s being dominated by Trump and what he will do next? While there have been media headlines about markets dropping, they have also had some good days too, proven by the fact our 100% share portfolio (the most volatile portfolio we would normally recommend) has only fallen by about 2% since the beginning of 2025. In essence, any returns which were made in Trump’s initial weeks and months, have been lost, and we are pretty much back where he began.
But this is only a very small snapshot in time.
“Time in the market beats timing the market.” – Kenneth Fisher
Most people are not investing for the next week, 6 months or even year. Most people are investing for decades, multiple decades in fact. So, if we look through a short-term lens, volatility can seem scary. If we stand back and look at the bigger picture it really isn’t that bad. And we know that is easy for us to say, but we have skin in the game ourselves here. The key is to hold on and accept that this is a natural part of the investment process and experience. If you can embrace it then you are much more likely to have a positive investor experience in the long term.
# Remember: Past performance is no guarantee of future performance. Investments can and will go down as well as up and you may not get back the original amount of your initial investment. Please seek professional advice when considering investing money.