History is on the side of those who sit tight

When markets are going up, investors rarely pass an opportunity to check on their stock market savings and take comfort at the rise in value. But when markets are plunging, as now… they stop looking.

That, I suspect, is the case with millions of private investors. They have stopped looking – and, even when they do, they have the queasy suspicion it’s got even worse by the time they turn away.

Conventional advice has long been to keep a close eye on holdings and watch out for trading statements that can have an adverse impact on share values. We are urged to be constantly vigilant.

But that is of little help when markets are tumbling across the board and at such a pace that we can barely keep up with the speed of declines. Many have been panicked into selling – in the final week of February a record £1.55 billion was pulled from funds. The deluge of selling, says funds network Calastone, made February the worst month for fund outflows since January 1986.

Little wonder that the advice is to stop looking. Not only is the constant checking adding to our general apprehension but it could provoke us into indiscriminate selling and the realisation of losses that could take years to make good.

The market is telling us something we already know – that the coronavirus epidemic and the huge hit it is having on economic activity will intensify in the weeks ahead. Surely if we sell now we can avoid the worst damage to our savings and buy back in the late summer and autumn when the worst of the virus has passed?

But there are good reasons to sit tight and avoid a panic reaction. First, most of our savings are spread across different asset types – bonds (which have held up relatively well) as well as equities and cash. Because of this, most portfolios will not be showing the extent of losses suffered by major equity indices such as the FTSE 100.

Second, a rebound when it comes will be difficult for investors to catch in time to capture the full benefits. Markets can turn with dramatic speed and often when private investors least expect it. Many prefer to wait until a recovery is established before embarking on a cautious re-entry – by which time activist traders are taking instant profits and selling out. By then we are totally confused as to whether this is a sustainable recovery rally or a temporary bounce.

Selling down now also involves a loss of dividend income as well as a capital loss. And because income is often the key consideration in our choice of stock market funds and trusts, that means a double blow to our savings. Better for investors to stand back and take a broader view. The billions we have entrusted to pension funds were never intended as a frantic pursuit of short-term gains and frenetic buying and selling with every turn in the market, but as a long-term commitment stretching over decades.

That doesn’t mean market slumps are somehow magically avoided. But what the longer-term view tells us is that losses are overcome and gains established over time.

When we look at the history of market slumps, such is their frequency and severity that few would dare to invest. We had market panics in 1796, 1825, 1847 and 1866. There has never been uninterrupted calm and stability. More recently we had the devastating 1973-74 bear market, Black Monday on 19 October, 1987, the Asian financial crisis of that year, the 2000 dotcom bubble and bust, the reaction to the 9/11 terror attacks, the financial crisis of 2008-9, the flash crash of 20101, the 2018 global market downturn and now the coronavirus outbreak.

Each one was accompanied by dire warnings of doom and disaster. Who would dare trust markets for our pension savings over 30 years?

But for a 40-year-old who began pension saving ten years ago in 2010, the MSCI World Index has returned 179 per cent, despite the impact of recent market falls. For investors in their fifties, many of whom may have put a fair proportion of their pension into equity income funds and trusts, they will have weathered the dotcom bust and the financial crisis to experience a 143 per cent return on the All-share index.

For investors in their 60s who began investing 30 years ago, the FT All Share has generated a return of 938 per cent. And for septuagenarians, the return on investments made in 1986 as measured by the FT All-share would be 1,864 per cent – even after the market fall of 12.8 per cent over the past two weeks.

Reinvested income over time, and the miracle of pound cost averaging – where your regular monthly contributions through market falls help to lower average buying costs – work to power long-term investment returns. Apprehensive private investors would do well to ponder the wisdom of holding on through this unnerving time.

Markets can turn

with dramatic speed and when private investors

least expect it