Wars, natural disasters, economic strife, and pandemics – the last four decades have challenged and affected people’s attitude towards investing.
In many cases they make an already tough decision to commit your money to investments even harder, leading some to not invest at all.
Behavioral scientists have a name for this: loss aversion. They estimate that the psychological pain of losing is about twice as powerful as the pleasure of gaining, hence why some people shy from the risks involved with investing.
Yet as Schroders’ research shows, staying out of the stock market over the last 33 years could have proven costly.
The eroding effects of inflation and historically low interest rates would have eaten away at the value of your money if you decided not to invest.
While investing in the stock market carries greater risks (the possibility of your losing all the money you have invested) and volatility (the value of the money you have invested going up and down) it could have boosted your returns.
Schroders research found, after adjusting for the effects of inflation:
- £1,000 hidden “under the mattress” at the start of 1989 would now be worth £415 due to the effects of UK inflation – annual growth of -2.60%.
- £1,000 left alone in a UK savings account at the start of 1989 would now be worth £1,756 – annual growth of 1.70%.
- £1,000 invested in the FTSE All-Share index at the start of 1989, with all income reinvested, would now be worth £6,600 – annual growth of 5.90%.
These figures are not adjusted to include any account charges or investment fees.
The chart below illustrates the change in “real” (meaning after inflation) value each year of £1,000 invested in UK stocks, a UK bank account or left under your bed.
Please remember that past performance is not a guide to future performance. Investing in one geographical region (UK equites) may result in large changes to the value to your investment, which may adversely impact the performance.
A short history of stock market crashes since 2000
The last 32 years have included some of the biggest stock market shocks in history.
The most recent shocks have resulted from Russia’s invasion of Ukraine, triggering enormous uncertainty over financial consequences including energy supplies and economic knock-on effects.
In 2020 and 2021, markets were primarily concerned with the pandemic. Covid-19 was the major contributing factor to three of the ten biggest one-day falls over the last four decades.
Yet while Covid produced some large one-day falls, the fall in UK shares of nearly 10% during 2020 was modest in comparison to other yearly falls experienced since 1989.
The global financial crisis of 2008, which began with the gradual collapse of the housing market in the US the year before, led to the worst global recession since the 1930s. In the year to the end of 2008 the FTSE All-Share was down 30%, its worst annual performance since 1989.
In 2001, the FTSE All-Share index fell by 13%. This was in the wake of the bursting of the “dotcom bubble” at the end of 1990s, when highly-rated technology stocks were sold off. It also coincided with the devastating attacks on the World Trade Centre in New York in September. The period also saw a global economic slump, although the UK managed to avoid recession. The FTSE All Share index was down 22% in the year to the end of 2002.
The table below illustrates how your investment returns could have built up year by year between 1989 and 2021 and shows the damaging effect inflation can have on your wealth. It also shows the global events that could have deterred investors in any of those given years.
Nick Kirrage, a fund manager and author on the Value Perspective investment blog, has written often about the danger fear can play.
“People can lose touch with just how bad things have looked and been in the past,” he said. “That can lead to them taking – or failing to take – actions in ways that can harm their personal wealth for decades to come.
“This data shows that investors who had instead opted to stay in cash would have seen their savings destroyed by inflation during a period when the stock market rallied. There are many other periods of the last century which offer the same conclusion.
“The reality is that there is no ‘perfect’ time to put money into the stock market. If you are holding out for one, you are going to remain in cash forever and, over the longer term, you are likely to be materially worse off as a result.”
The opinions included above should not be relied upon and should not be construed as advice and/or a recommendation. Past performance cannot be relied upon as a guide to the future performance and the value of your money may fall when invested.
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