Swift and dramatic change can take a toll on investors. When markets falter, some may be inclined to reduce their exposure to equities. Yet history shows that periods of turmoil and steep market declines have subsequently proven to be among the best times to invest. Recent volatility may have caused some investors to panic and head for the doors, but a long-term focus can help put ‘bear markets’ into perspective.
Since 1970 there have been five periods of 20% or greater declines in the MSCI World Index. While the average 37% decline during these cycles can be painful to endure, missing out on part of the average bull market’s 283% return would have been even worse.
The much shorter duration of bear markets (15 months on average) is also a reason why trying to time investment decisions can be difficult and is usually ill-advised.
During a ‘bear market’ investors should ensure that their portfolio has appropriate diversification among the major asset classes.
Diversification also extends down another level. If you have a portfolio that is well-diversified among the various industry sectors within an asset class (such as Australian shares) than you can see during the last few market declines there has been a clear pattern where the more defensive sectors of the market – consumer staples (think Coles & Woollies), utilities, telecoms, and health care – have done the best.
During the recent Covid-19 crisis, some sectors again have provided a measure of portfolio protection among the ‘doom and gloom’. Sometimes when times are tough and all investments are trending down, effective diversification can mean that you will be well-positioned to enjoy the eventual rebound when market sentiment improves.
Source: Capital Group 2020.