Stock Market Profits for Those Who Can Wait: Lessons from Black Monday in the Stock Market | Financial Markets

Panic gripped the market on August 5 after a disappointing employment report for the US economy, which had so far maintained enviable growth. Stock markets in almost all regions turned red: the Nikkei fell 12.4% in its worst session since 1987, the Nasdaq fell 6%, the London stock market fell 2% and the Ibex 35 lost 3.5%. In a few hours, all the gains made by the Spanish sector in the last three months were wiped out, while in many analyses the term “recession” was coined for the largest economy on the planet.

The horizon was full of investors who decided to pull their money out, fearing that the bleeding in the stock markets would continue. A serious mistake. At least, that’s what a study by British asset manager Schroders explains, who analyzed the past 100 years of US stock market data to demonstrate the importance of “keeping a cool head during a crisis,” since patience is rewarded in most cases. On the contrary, the shorter the time an investor stays with their bet, the greater the chance of losing their entire capital. The shortest period of time that Schroders uses as a benchmark is 30 days: “If a person decided to invest their money for a month, they would lose it 40% of the time, that is, in 460 of the 1,153 months of our analysis within the 100 years analyzed.”

According to Schroders, the stock market crash of August 5, as often happens in the stock market, was a reaction to “hot decision-making”. To this we must add the possibility that inflation will take away the money invested. In recent years, the general price index (CPI) data have been high for most major economies. In the summer of 2022, the US CPI exceeded 9%, while in Europe the price spiral reached 10% at the end of 2021. “As all who save money know, recent experience has been painful,” the report specifies. Schroders analysts remind us that the last time cash beat inflation over a five-year period was between February 2006 and February 2011, “now a distant memory”, but this suggests that investors canceling their bet should take into account the impact of inflation.

That’s why timing is crucial: “Abandoning stocks for cash in response to a big decline is bad for long-term wealth.” The longer money is held in the markets, the lower the risk of loss. According to the study, after 12 months, the probability of recording a loss drops to 30%. “And most importantly, a year is still a short period of time in stock market terms,” they point out. And over a five-year horizon, that probability of loss drops to 22%, and over 10 years, to 13%. One of the most pertinent findings is that virtually no one who left their money for more than two decades lost money in the stock market.

Market turbulence is just around the corner and there are a few years that will spare the turmoil, the UK agency warns. At least 30 of the last 52 years have seen stock market turmoil that has seen the market lose around 10% of its value. Over the past decade, that includes 2015, 2016, 2018, 2020 and 2022. And even steeper declines of 20% have occurred in 13 of the last 52 years, or about once every six years.

Moreover, Schroeders warns that in most cases these are losses that investors may not recover from for many years. The firm explains that investors who pulled out their money in 1929, after the first 25% decline of the Great Depression, would have had to wait until 1963 to break even. Although if they had maintained their faith in Wall StreetLikewise, an investor who switched to cash in 2008, after the financial crisis began that year, would still be holding his portfolio below market value.

Fear Index Warnings

After the big panic at the start of August, the waters appear to have calmed. The Vix, also known as the fear gauge, hit new highs earlier this month as investors worried about a recession in the U.S. economy. The gauge, which measures the volatility that market makers expect from the S&P 500 over the next 30 days, topped 60 intraday on Aug. 5, hitting a volatility peak not seen since the pandemic. But it has fallen back in the days since, and is now trading at levels that existed before that moment of stress.

Schroders insists that if investors remain calm and can stay calm through these peaks, they will do better, especially in a scenario where they sell their shares to re-enter the market when stocks are low. The company’s research shows that if investors had withdrawn their money to buy back later, they would have earned a return of 7.4% per year, while maintaining their commitment to stocks would have resulted in an annual return of 9.9%. Regardless, he warns, “as with all investments, the past is not necessarily a guide to the future, but history suggests that periods of greatest fear, like the one we’re experiencing now, have been better for investing in the Bag of What Should Have Been Expected.”

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