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Market downturns can lead to up years - A Positive Story  

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Last updated: January 23, 2024

When markets drop, it can be unsettling. However, in the past, evidence shows that US stocks have, on average, made a positive return following sharp downturns. Reassuring to note!  

Keep at it

As one of our preferred fund managers, Dimensional, puts it “Sticking with your plan helps put you in the best position to capture the recovery.” And they prove their point showing the 1, 3, and 5 year average cumulative returns after 10%, 20% and 30% market declines. No surprise, they are all positive figures – take a look at the PDF below.  

Volatility is to be expected when investing...

...so it’s important to prepare for it. Especially, when you consider missing the 10 best days in the market can reduce your portfolio value by up to 50%*. Maintaining a long-term focus can help you keep perspective and meet your financial objectives. You can learn more about trusting the market and how to keep a level head about investing here.  

As another point of reassurance, we can refer to a second chart showing positive returns overall within the year, despite intrayear declines. (Intrayear means declines that took place within a certain period inside of the year).  

Again, courtesy of Dimensional, it portrays the steepest declines within each year where almost always, the overall yearly return ends up being positive. A key indicator that past performance is not a guarantee of future results and a sign that waiting out isn’t lazy, but strategic.  

Ensure you hit the best days

To further our point, Visual Capitalist takes a similar view, with some interesting stats to prove it*: 

“Over the last 20 years, seven of the 10 best days happened when the market was in bear market territory (in broad terms, when investment prices drop). 

Adding to this, many of the best days take place shortly after the worst days. In 2020, the second-best day fell right after the second-worst day that year. Similarly, in 2015, the best day of the year occurred two days after its worst day.” 

How can you build a resilient investment mindset to capture those best days and profit from the long-term gains?

Knowing when to listen to the media is crucial, and a logical outlook when news stories break helps you stick to your financial plan. You can find tips on tuning out press noise and tuning into beneficial information here. A key takeaway is to consider whether the news is based on historic evidence and years of study (green flag!) or an attention-grabbing blip in time that perhaps isn’t indicative of future performance (red flag!).  

Look at investing as you would look at life

As financial trailblazer and former CEO, David Booth puts it**:  

“Uncertainty can be uncomfortable, but without it, there would be no opportunity. When we decide to move to a new city or change career paths, we don’t know exactly what will happen. Yet these experiences help us grow and change our lives. 

When we invest, returns are compensation for taking on uncertainty. Without risk, there would be no reward. But there’s also risk in not investing. If our money doesn’t grow over time, it won’t go as far in the future. 

This approach to life and investing guides us through uncertain times and helps refocus our attention on the opportunities ahead.” 

In summary then, a stable and steady temperament is essential to consistent returns on investment. It’s no mean feat, so if you think you’d benefit from some reassurance to keep on the right track, we’re just at the end of an email or the phone. Initial consultations are always at our expense.  

*https://www.visualcapitalist.com/chart-timing-the-market/ 

**https://www.kiplinger.com/investing/life-lessons-that-also-apply-to-investing 

This content is for information purposes and should not be treated as financial advice. We would always recommend speaking to a professional before making decisions regarding your wealth.

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The value of investments can fall as well as rise and you may not get back the amount originally invested. Past performance is not a guarantee of future results. Values change frequently and past performance may not be repeated. Even a long-term investment approach cannot guarantee a profit.

Tax treatment varies according to individual circumstances and is subject to change. Please note that the FCA does not regulate will writing, tax planning and trusts.

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