Each time there is a major stock market decline, the financial press say the same thing: “This time it’s different”. What they mean is that the stock market decline of that particular moment is different to all the other declines that have happened in the past. They imply that there is a risk of a permanent loss of capital and that investors should run for the hills and the supposed ‘safe haven’ of cash.
Before I go on, I’ll assume that investors have the basics of investing sorted out and that they –
- Have enough money in cash deposits for their short-term needs.
- Are not taking any more risk than they can tolerate within their investments.
- Their investments are diversified (i.e. spread out) globally and not concentrated in the UK stock market.
Assuming the above is in place, the only way that there could be a permanent loss of capital is if we had a complete collapse of the capitalist system. If this happened then the banks would be failing, governments would be bankrupted, and we’d all be growing vegetables in our back gardens! The collapse of capitalism is such an extreme outcome that it really isn’t worth worrying about at all.
Let’s now discuss something a bit closer to reality.
n all honesty, we have no idea how Brexit will impact our economy, but this should have no bearing at all on your behaviour as a long-term investor. From an investing point of view, Brexit is simply the crisis of the moment and if we look back over previous decades, there have been various times when it felt as though the financial world was about to end! We had the oil crisis of the 1970s (remember sitting round with candles?), the Black Monday stock market crash of 1987, exchange rate mechanism problems in the 1990s and terrorism and the Iraq war in the 2000s. If we look at a chart showing long-term stock market returns, any decline linked to the above-mentioned events looks like a blip, rather than the crisis that it seemed to be at the time. Global stock markets are made up of real companies selling real things to real people. This doesn’t change just because there is a temporary decline in stock market prices. Eventually everyone realises that the world hasn’t ended, and stock market prices recover.
In the long run, the capitalist system (and therefore the stock market) has generated, and will continue to generate, above-inflation returns as the human race innovates and progresses. We know that every few years we have a major decline in stock market prices. It’s normal. It has always happened, and it always will. The rewards are there for the taking for the patient, long-term investor.