Are Stock Markets Riding Too High?
Your financial masterplan should be beautifully simple – clear goals with sensible decisions and regular funding over time – but that doesn’t always mean the journey is easy, particularly where markets are involved.
Pensions, ISAs and the other financial products that support your plan are mostly invested in shares, and with good reason.
Real assets, such as shares, not only have the potential to increase in value over time, they also have the ability to produce a rising income. When these returns are compounded, powerful long-term growth usually ensues.
And because stock markets have existed for several centuries, we understand the expected returns and how to manage their risks.
But when the world starts to feel messy and confusing, as it often does, it can test your resilience and tempt you to make decisions that might hinder rather than help your plan.
You wouldn’t be human if you didn’t feel the fear that comes with uncertainty.
Stock market peaks
Nerves don’t only manifest when markets fall but also when they hit new highs, just like they did in the US recently. It’s a natural feeling for investors to expect that what goes up can only come crashing down.
The thing is, when markets are working as they should, reaching record highs with some frequency is exactly the outcome we should expect. This happens thousands of times a century in stock markets.
Markets hitting new peaks might feel like meaningful cliff edge moments, but statistics tell us a different story.
In the US market between 1920 and 2020, in the 5-year period following every new market high, the average yearly return from the index was a respectable 10% per year*.
Care to guess the average yearly return from any 5-year period over that same 100 years?
Somewhat reassuringly, it was near enough 10% per year.
*Source: 2021 S&P Dow Jones Indices LLC, a division of S&P Global.
Remember the fundamentals
When market levels begin to test your fortitude, try to remember the fundamental fact that shares are part ownership of organisations that create wealth.
A company consists of real people, making real things, that they sell to real people for a real profit.
Virtually everything you see in front of you right now has been served to you by companies that form part of a powerful and progressive market system developed over hundreds of years.
For this reason, it pays to side with stock markets rather than against them. And whilst we can’t predict the nature or timing of short-term crises, we can bank on human ingenuity finding a path through it (the pandemic being no better example of this).
Betting against the market and trying to call their tops and bottoms is not only exhausting, it’s speculative and risky. Markets always reward you in the long-run, so why would you want to gamble with money that’s to sustain your future standard of living?
What do we think this year will bring? Will the market hit more peaks? I don’t know. No one does. Think about it: No one does. After these last two years, this lesson should be obvious to all of us.
In 2022, new challenges await. New businesses will grow. Old ones will adapt. Some will fail, while others flourish. Rather than having to guess what will happen to whom and when, choose a different path. Simply trust the market.
When viewed through this lens, it’s hard not to be optimistic. It’s not always easy to maintain. But if you can, it’s worth it.
There’s an old Chinese proverb that says: “The best time to plant a tree was 20 years ago. The second-best time is now.”
The decision to funnel money into your financial masterplan is no different.
Get in touch if you’d like help with your masterplan and planting the right trees for your future.
I promise you, your future self will thank you for it.
The value of an equity investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.