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Another Triumph For The Optimists

February 16, 2024

It is tempting to believe that an investor’s long-term outcome depends on how many successful companies they can invest in. While this metric will certainly have some bearing on an investor’s returns, we believe that the key metric that determines success is how many temporary declines, or “bear markets”, they can endure with patience and discipline.

Often characterised by worsening economic fundamentals and widespread panic, these periods test the resolve of even the most experienced investors. At the height of the decline, with negativity all around them, every investor is forced to grapple with the big question, “We’ve recovered from past declines, but is it different this time?”.

Inevitably, as we’ve learned from history, the storms pass, and concerns are resolved. Ultimately, investors who remain optimistic about the market and humanity’s long-term prospects are rewarded with returns that most investors will never achieve.

A Dark Time

With global markets recently reaching new all-time highs, we want to reflect on the last two years and reinforce the enduring benefits of patience and discipline.

On 3 January 2022, almost two years after the first Covid-related market decline, the S&P 500 index reached an all-time high. Then, precipitated by ongoing global inflation and a rising interest rate cycle, markets started to decline, officially becoming a bear market (a decline of 20% from the previous high) in June 2022.

Four months later, in October 2022, the value of the world’s biggest publicly traded companies had been marked down by 25% since the start of that year.

To remind you, at that time, the Russian invasion of Ukraine gripped the world. Liz Truss was the UK Prime Minister, and global inflation was near its peak. ChatGPT had not even been released yet.

There was a lot to be worried about, and many feared that further market declines were likely. In short, it was not easy to be an optimistic investor.

Rational Temptations

While the future will always be uncertain, times of heightened financial distress will always force investors to question their faith in the future. Under these conditions, it’s tempting to make changes that would not seem reasonable under more stable conditions.

After months of distress, many investors capitulated to the prevailing negative sentiment, switching out of long-term investment portfolios to minimise further losses. With cash returns at levels not seen in a long time, we are sympathetic to investors who made these changes out of uncertainty fatigue.

However, we strongly believe that the economy cannot be forecasted, and markets cannot be timed. Any decision that relies on one of the above is pure speculation and not worthy of inclusion in any financial plan.

A Time to Celebrate

We now know that this decline, like the others before it, was temporary.

After almost 300 days of gradual declines, the market started its slow climb to recovery. Now, more than 450 days since the dark days of October 2022, the market has advanced by more than 37%, completely erasing the mentioned declines.

With the 2022-2024 bear market now consigned to history, we encourage you to celebrate your discipline and patience during this period if, indeed, you had the fortitude to stand strong. If you made decisions you now regret, take comfort from the fact that any lessons you learned can be applied when the next decline arrives.

When will the next decline arrive? We don’t know, and neither does anyone else. However, rather than fearing the next 20% decline, we caution you against missing the next 100% advance. Both events will surely happen; we just don’t know when.