Why equity investors must stay the course

By Morningstar Analysts |  29-07-20 | 

The circumstances of the 2020 market crash might be unique to the coronavirus pandemic, but they lead investors to wonder: Are such drops normal for equity markets, or is this different?

Paul Kaplan, director of research for Morningstar Canada, looked at the U.S. stock market over 150 years. Over this period, $1 invested in a hypothetical U.S. stock market index in 1871, would have grown to $18,500 by the end of June 2020.

But it wasn’t a smooth ride to get there. There were many drops along the way, some of which were severe. The market always eventually rebounded and went on to new highs, but it may have been hard to believe this during some of the long-term bear markets.

  • 79% drop - the crash of 1929, which led to the Great Depression.
  • 54% drop - from August 2000 to February 2009, also known as the Lost Decade. This period started when the dot-com bubble burst. The market began recovering but not enough to get the cumulative value back to its August 2000 level before the crash of 2007-09. It didn’t reach that level until May 2013—almost 12 and a half years after the initial crash.
  • 51% drop - between June 1911 and December 1920. This market downturn may be most relevant to today’s situation since it included the influenza pandemic of 1918.

Investment analyst Mohasin Athanikar looked at the growth of Re 1 (based on S&P BSE Sensex total return index) from August 19, 1996 to July 28, 2020. That is a 12.64% CAGR.

Again, it was not a smooth ride. There were various events that severely impacted the Indian stock market over these years.

The Asian financial crisis, dotcom meltdown, the India-Pakistan and India-China stand-offs and border skirmishes at various times, the 9/11 terrorist attacks on the Twin Towers in New York, war in Iraq, the GFC, the eruption of the European debt debacle, the market reeling under talks of tapering by the U.S. Federal Reserve, the rupee crashing, de-pegging of the Swiss franc, Renminbi’s devaluation, Greece on the verge of crashing out of the euro, bursting of China’s stock bubble, a bloodbath for commodities and sliding crude oil prices, trade sanctions in the battle between U.S. and China, and now the pandemic.

Market crashes aren’t as unique as one might have thought.

Recognizing their frequency can help provide a better sense of the risks of equity investing.

Given the regularity of market declines, it’s clear that market risk is about more than volatility. Market risk also includes the possibility of depressed markets and extreme events.

These events can be frightening in the short term, but for investors who can stay in the market for the long run, equity markets still continue to provide rewards for taking these risks.

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