What are people worried about?
It is the risk of losing capital. It is market risk. This is an imminent risk and therefore possibly the most frightening risk. It conjures up images of people losing all their money i n market crashes, despondent traders and red screens.
Market risk can be defeated by patience. It dissipates over time. History shows that there are very few five-year periods within which investors will have lost capital. The longer the holding period, the lower the chance of losing capital and underperforming cash. The catch is of course in the word ‘ Hold’. History also shows us that investors are skittish.
Markets fall for reasons. There are hordes of clever investors who react, seemingly logically, on the prospects of poor economic times ahead. If you are a long-term investor though, your time horizon is not the next year or even three years. Your time horizon is sometimes twenty or even forty years. In any event, markets start recovering long before the economy recovers. No one rings a bell to declare the end of a bear market.
Have you ever heard investors say: “I will rather miss the first 10% of the upturn and be sure that the trend has turned?” Who will tell you that the trend has turned even after 10%? Rather stay invested. The benefit of investing in the share market over the long-term is compounding, not timing. Albert Einstein called it “one of the most powerful forces in the universe”. The power is only available to those who stick it out.
Market risk can also be offset by diversification i nto safe asset classes. If you are exposed to a few asset classes, the chances are that some will perform when others do not. That is the key to a diversified portfolio – not all your assets can do well at the same time. Measure your overall wealth, not the underlying constituents.