With the UK sliding into recession, war ruining Ukraine, and inflation stalking the High Street, now may not seem like a good time to invest.
Perhaps it’d be best to keep your financial powder dry? To wait for better days?
That makes perfect, intuitive sense – until you step back and look at the bigger picture.
In the long run, equities go up
The bigger picture looks something like this: the most reassuring chart in investing…
The chart shows inflation-adjusted, UK stock market total returns2 surging through 150 years of upheaval and periodic catastrophe.
Despite the regular, tragic punctuation of financial and human carnage, equities kept rising over the long-term.
And whatever challenges we’re facing now, they’re unlikely to be as disastrous as the devastation wrought by the one-two punch of World War One and the Spanish Flu.
Or the Great Depression followed by World War Two.
The UK’s worst stock market crash was the -73% real terms decline that played out over 32 months of misery from 1972 to 1974.
You can see the gouge it tore in the graph above during the years of stagflation in the 1970s.
But progress eventually resumed. Just as it did after the Dotcom Bust (-44%) and the Global Financial Crisis (-43%).
Even the recent Covid crash barely registers in retrospect.
Investing is one damn thing after another
Perhaps our current woes auger the next calamity? Maybe it would be best to batten down the hatches for now?
Time will tell. But the world is always troubled.
Here’s a catalogue of threats that menaced investors in the years that followed the Global Financial Crisis:
2010 – Greek bailout, The Flash Crash2011 – EU debt crisis, double dip recession, US downgrade2013 – The Taper Tantrum, US government shutdown2015 – Chinese stock market crash2016 – Brexit referendum, Trump election, Fed rate hike jitters2018 – US-China trade war, quantitative tightening 2019 – Inverted US yield curve, Great Stagnation warning2020 – Covid, running out of Netflix shows in lockdown2021 – Covid, Evergrande liquidity crisis, global energy crisis2022 – Inflation surging, Russia invading Ukraine, deepening energy crisis, global downturn
Scares and setbacks continually close in on us like the walls of the Death Star’s trash compactor.
In fact you could reach back into history and put together a list of cascading crises, dire prophecies, and apocalyptic warnings for almost any year.
But there’s no point living like that.
On a personal level it would mean never stepping into a car, or dating, or going outside.
Financially, it’d mean measuring your wealth in prepper stockpiles rather than in the stock market.
To achieve anything like the (272,700%) growth of £1 shown on the chart, we must accept some risk and uncertainty.
We can stay the course by keeping our eyes on the prize, not the temporary reversals.
Pain is why you are paid
Many of the market’s biggest opportunities have followed its most dramatic falls.
Prices rocket when investors eventually realise they overreacted to the last shock.
But human psychology guarantees you’ll fail to grasp those moments if you don’t upgrade your mental firmware from the basic fear and greed package.
Greed sucks us into rising markets. Think 19th Century Gold Rush or 21st Century Crypto Bubble. We’re like moths to the money flame.
Then we get burned. Fear takes over and instructs us to: “Freeze! Just chill for a while. Let’s wait and see what happens.”
And then all of a sudden the market marches on without us. We miss most of the rally…
…until eventually greed overwhelms our fear again – dragging us back into the action because nobody wants to miss the last train to Fat Stacks City.
This is the chimp version of scissors, paper, stone. Greed beats fear. Fear beats greed. We flip-flop in time to the market’s beat, but out of tune with the opportunity.
Playing the market this way only increases the risk of buying high and selling low.
But wading in when your instincts scream: “Danger! Danger!” will increase your odds of buying low and selling high.
As Warren Buffett puts it: “be fearful when others are greedy and greedy when others are fearful.”
Is now a good time to invest?
In retrospect, the historic traumas charted above proved brief downward squiggles on the great graph of historical returns.
Progress is not inevitable, of course. But we shouldn’t lament the lack of guarantees either.
Uncertainty is the gunpowder that propels our future returns. It’s exactly because of the risk of loss that investors demand the prospect of higher returns from equities.
No-one gets paid for betting on a sure thing. But buying a stake in the continued progress of humanity – and its main engines of productivity – has paid off for the past 300 years.
Check out our guide on passive investing to see how to make it work.
Take it steady,
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.We’re using UK stock market returns but the picture would be similar if you used the US or the World market.
Why now is almost always the right time to invest.
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