The certainty of uncertain times

Invest for long term to smooth out ups & downs

We are living in a time of extreme uncertainty, and all the anxiety that brings.

Against the backdrop of war, humanitarian crisis and economic hardship, it’s natural to wonder what effect these world events will have on our long-term investment performance.

While these challenges do warrant our attention, and even deep concern, they needn’t be a reason to panic if you’re focused on long-term investing. Imagine it’s 25 years ago, 1997:

JK Rowling just published the first Harry Potter book.

General Motors is releasing the EV1, an electric car with a range of 60 miles.

The internet is in its infancy, Y2K looms, and everyone is worried about the Russian financial crisis.

A stranger offers to tell you what will happen over the next 25 years. So… would you invest in stocks knowing of the following? And could you stay invested? Asian contagion Russian default Tech collapse 9/11 Stocks’ “lost decade” Great Recession Global pandemic Second Russian default What would you have done? Got into the market? Got out? Built your equity holdings? Decreased them?

Let’s look at what happened. From January 1997 to December 2021, the world stock market returned, on average, 11.5% a year. A £1 investment would have ended up worth almost £9.

These returns are very much in line with results across the history of the stock market. How can that be? The market is doing its job. It’s science.

Investing in markets is uncertain. The role of markets is to price in that uncertainty. There were a lot of negative surprises over the past 25 years, but a lot of positive ones as well.

The net result was a stock market

I have an absolute faith in human beings’ ability to deal with tough times

return that seems very reasonable, even generous. It’s a tribute to human ingenuity that when negative forces pop up, people and companies respond to get things back on track.

Think how different life is from how it was in 1997: the way we work, the way we communicate, the way we live.

The gross domestic product of the US then was $8.6trillion – by 2021 it had grown to $23trillion.

I am an eternal optimist, because I believe in people. I have an unshakable faith in human beings’ ability to deal with tough times.

In 1997, few would have forecast a nearly 10% average return for the stock market. Yet that’s what was available to anyone who could open an investment account, buy a broad-market portfolio, and let the market do its job.

Investing in the stock market is always uncertain. Uncertainty never goes away. If it did, there wouldn’t be a stock market. It’s because of uncertainty that we have a positive premium when investing in stocks vs. relatively riskless assets. In my opinion, reaping the benefits of the stock market requires being a long-term investor.

By investing in a market portfolio, you’re not trying to figure out which stocks are going to thrive, and which aren’t going to be able to recover.

You’re betting on human ingenuity to solve problems.

The pandemic was a big blow to the economy. But people, companies and markets adapt. That’s my world view.

Whatever the next blow we face, I have faith that we will meet the challenge in ways we can’t forecast.

I would never try to predict the events of the next 25 years. But I do believe the best investment strategy is to keep in mind the lesson learned from that stranger back in 1997: Don’t panic. Invest for the long term.