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Written by: Andrew Craig
09/11/2015
There has been a discernible increase recently in articles and talking heads raising the red ‘crash alert’ flag for pretty much all asset classes.

Turn on the radio, or television and you will find bearish predictions about stock-markets, bond markets, precious metals and even London property.

At times like these, it’s extremely important to remind yourself again and again there are ways of making it so none of this noise should matter to you. All markets crash, but seldom at the same time and often not for long, meaning you can arrange your affairs so you have something which will continue to perform.

Research from Professors Elroy Dimson and Paul Marsh at the London Business School has found the annualised return on London-listed UK smaller companies from 1955 to 2014 was no less than 16.8 per cent.

There would have been a number of occasions throughout that time period where your investment in these companies would have been down by as much as half. If you had sold out, you would have ‘crystallised’ that substantial loss.

As a patient investor, however, ignoring the noise and continuing to invest regularly, you would have made life-changing returns. Remember, these sorts of returns will turn a couple of hundred pounds saved each month into a meaningful seven-figure sum over twenty years.

Another example of this would be people in the mid-1970s who continued to invest in gold. Gold went up 2,400 per cent (24-fold) from 1971 to 1980 but pulled back by around 50 per cent in the mid-seventies. The people who gave up at that point missed the biggest moves that followed.

Examples like these are the reason investors like Warren Buffett’s right hand man, Charlie Munger has said: “…if you’re not willing to react with equanimity to a market price decline of 50 per cent two or three times a century … you deserve the mediocre result you’re going to get…

It is also why one of the world’s biggest investment companies, Fidelity, found that their best performing investors were quite often dead people (who still had open accounts that no one had ever laid claim to) and why some of the very best (and most secretive) hedge funds and ‘family offices’ in the world lock their investors’ money up – sometimes for as long as seven years, to stop the natural human reaction to panic and sell out!

Of course, no-one wants to see their money cut in half but it is worth just remembering in the marathon (not sprint) that is long-term wealth building, you will very often still be best served holding your nose and continuing to invest month after month rather than giving up altogether when there is a crash.

In 2009, the S&P crashed to the low of 666. It is now around 2,100. If stock markets have a massive crash again from here (to 1,000 even!), the people who have been buying ever since the bottom in 2009 will almost certainly still be sufficiently above water to still be making enough of a return on their money to become wealthy, especially when you consider reinvested dividends.

They will be doing immeasurably better than someone saving their money in cash with interest rates basically at zero.

Andrew Craig is the founder of Plain English Finance

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