Did you, or do you still, get the sense that investing falls into the “don’t try this at home” category? Much like running with scissors, it can only go badly, right? You might worry — you’re frequently even urged to worry — that you’ll lose everything. When the well-being of yourself and your family’s financial well-being is at stake, something you’ve spent decades ensuring, it’s little wonder we occasionally endure sleepless nights. This is the reason individual investors are easy prey for doom harbingers.
Experts claim to be able to predict the next market crash, and there’s always someone who called the last one right, to the very second and to the last penny! But I’d bet that person they couldn’t do it again. The secret is this: markets are volatile, and they crash pretty often. I could say the market is going to crash tomorrow, and if it did, it wouldn’t make me a prophet.
Historical data reveals share prices will fall 10% at least once in a given year, while every couple of years the market declines 20%, and in your lifetime you’re likely to see a 50% drop once or twice. If you’re not comfortable with this, then you probably shouldn’t be investing. That’s the main reason, in fact, why most people aren’t investors. Conversely, it’s for the exact same reason that investors end up wealthier than most people: the riskier an asset, the greater return you can expect.
When shouldn’t you invest?
The last market crash was five years ago. Since then the FTSE 100 (FTSEINDICES: ^FTSE) has risen by an average of 12% a year, which means that if you invested £100 a month in 2009 and your returns mirrored the blue-chip index, you’d now be sitting on £8,000.
We can extrapolate this further. Since the FTSE’s inception 30 years ago the market has returned 17% a year on average. If you started investing £100 a month in 1984, and again if your returns mirrored the index, you’ be a £1.1m richer now. A millionaire, just for being slightly bolder than most.
So, say I did claim the market was going to crash tomorrow and — what do you know? — there’s a crash! As we’ve seen, if your approach is ‘long term’ enough, then the market doesn’t move down so much as sideways. The trend is always up, and if you keep investing, even when the market is down, you’re more likely to have better returns than if you don’t. Stick at it for the long haul — even at the lowest point, the next bull market is just around the corner.
