Investing in a crisis

As we have written and spoken about many times over recent years, we believe that central to good investment outcomes is having a clear plan in place. At times like these we are thankful for our plans to help guide us through our decision making. We believe that having these plans increases the chances of good outcomes for investors, as it helps us put context around our investments and reduces the chance of making an unforced error of reacting to short-term market movements.

In MarketWatch 12 months ago we wrote about a framework for assessing your investments which asks the following questions. What do I own?; why do I own it?; and how long am I going to own it for? In this article we focus on the time element of investing and how we can assess recent moves from a historic context, and what past experiences might suggest for returns from here. Figure 1 below shows the distribution of weekly returns for US equity markets since 1964. As you can see, three of the most recent weekly moves (up to 20/3) appear to the very left of the returns and are amongst the 9 worst weeks for investors. The proximity of these moves has meant that this market sell off is the quickest in history which has undeniably added to investor anxiety, before we even allow for the concerns over the health of our loved ones.

Figure 1: Distribution of weekly returns for US equity markets since 1964

Source: Bloomberg; USD; retrieved on 2nd April 2020

So, what should investors do from here? A quote from former US President John F Kennedy offers a good perspective on the challenges we face at times like these.

What is the danger here for investors? We acknowledge that things could continue to get worse for a while here but if your time horizon is long term and you don’t need these funds in the short term, then selling after falls of this magnitude look like the dangerous choice today. As for the opportunity? Let’s look at what has happened in the past as it offers us some context for our decisions.

We looked at the 12 worst weeks for investors as measured by US equities (again since 1964) and looked at what happened as we rolled forward the returns. As you can see the dates are quite clustered as our recent experience has also been. While the sample size is small, and the range of outcomes broad, in the short term we see very positive returns accruing to those who stayed invested or invested after these points in time.

Table 1: Distribution of weekly returns for US equity markets since 1964

Source: Bloomberg; Table shows returns after specific time period of the weekly drawdown; Numbers are in percentage; 14/04/2000 is
exception because this bad week led to 2001 crash based on the S&P 500 is local currency.

Investing is ultimately about probabilities, and of trying to achieve the highest chance of a good outcome. There are never any guarantees, but we continue to believe that investing in a well-diversified strategy, in line with a long-term horizon, offers the best chance of meeting our investment goals.