Short-term volatility and long-term investing
Source: FTSE All-share index
Calendar year return
Returns are based on Total Returns in GBP, including dividends. Intra-year decline refers from the largest market fall from peak to trough within the calendar year. Returns shown are calendar years for the FTSE All-Share Index from 2002 to 2021. Data as of 31 December 2021. Indexes are unmanaged and cannot be invested in directly. Unless otherwise specified, Russell Investments is the source of all data.
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*Volatility is the range of price change an investment experiences over a given period of time.
**Intra-year declines refer to the largest market fall from peak to trough at any point within a calendar year. This chart helps demonstrate that these happen frequently, but, more often than not, the markets still reported a positive gain for the full calendar year. Whilst these can be periods of panic amongst both retail and institutional investors, staying calm (and staying invested) is crucial.
For example, if you’d invested in the FTSE All-share index, at some point in 2003, your investment would be down -16%. However if you’d stayed calm and held tight, the investment would be up over +20% at the end of the year.
If you’d invested during the financial crisis in 2008, at some point in that year you could have been down -40%. If you’d stayed invested, you’d still be down at the end of the calendar year, but a smaller loss of around -30%.
You could have been down -7% in 2019, but ended up with a positive calendar year return of nearly 20%.
If you look at all the orange circles, the average intra-year decline was -16%, which shows that volatility is normal. Despite this, the FTSE All-share index posted positive returns in 15 out of the 20 calendar years. It’s important to ignore short-term volatility and focus on long-term investing.
We know we’ve seen volatility come back into the markets since Covid. For the preceding ten years there had been a healthy bull-run combined with QE that allowed people to forget volatility existed… The last 18 months has been a reminder that it exists and, is in fact normal…
Intra-year declines versus Calendar year returns
Everyone feels rattled when stock-markets drop suddenly and unexpectedly. When the markets get messy like this, generally it’s because investors (institutional as well as retail) lose confidence. No matter how well portfolios are positioned, we must acknowledge that stock-markets can sometimes go down via the elevator and come back up via the staircase.
Intra-year declines refer to the largest market fall from peak to trough at any point within a calendar year. This chart helps demonstrate that these happen frequently, but, more often than not, the markets still reported a positive gain for the full calendar year. Whilst these can be periods of panic amongst both retail and institutional investors, staying calm (and staying invested) is crucial.
The blue blocks represent the calendar year return.
This chart illustrates the returns of the FTSE All-share index over the past 20 years. The orange circles represent the largest fall from peak to trough within that particular year.
It’s worth noting that we wouldn’t hold 100% equities in our portfolios and certainly wouldn’t hold 100% UK equities, as we believe a global multi-asset multi-manager approach provides a more reliable return pattern for our clients.
Value of Global Diversification