Share price lows: when will markets turn around?
Investors’ confidence has sunk to a record 23-year low as a recent market selloff, driven in part by rising interest rates in America, has left the FTSE All Share index at its lowest value for 12 months.
Hargreaves Lansdown, the stockbroker, which has been measuring private investors’ view of the British stock market since the early Nineties, said people were now more pessimistic than they were during the financial crisis of 2008.
It said the low mood had been brought about by the “known unknown” of Brexit, with this month’s market volatility doing little to settle nerves.
Some investors will be asking themselves: should I sell now in case of further losses? History suggests that might not be the best idea.
Telegraph Money analysed data on the 20 largest one-day falls in the FTSE All Share index over the past 25 years, compiled by Schroders, the fund firm, and found that stocks tended to recover sooner than you might think.
There are some anomalies, but for the most part the same rule applies. At 10 days after the initial fall, the market will generally have dropped further. However, after a year returns are likely to be positive again, while at the three-year point returns will almost certainly be positive. By the time five years have passed you would be sure to have made a return.
Of the 19 scenarios for which we have five-year data, 12 saw returns of more than 80pc. There were only two scenarios in which returns were below 50pc five years after a slump.
On the worst day, Oct 10 2008, investors lost 8.3pc, but a year later the index had risen by 26pc, while three years later the rise was 41pc and at five years it was 87pc.
Will Hobbs of Barclays Smart Investor, an investment platform, said if anything market dips should be viewed as a buying opportunity. “History has frequently shown that the best time
When will markets recover?
to buy is when the markets are at their gloomiest and trading screens are splattered blood-red – yet this is precisely when we are most tempted to sell,” he said. “Capitulating in the face of dreadful headlines is understandable, as we seek to protect ourselves from further losses – but of course it has the effect of making the pain indelible.
“Staying the course is tough, but can turn those paper losses into profits if markets recover, as they nearly always have done in the past.”
David Coombs of asset manager Rathbones said investors should ignore short-term market upsets and adopt a long-term view. He said: “Many investors use financial markets as a sort of supercharged deposit account. They expect to be able to use their cash within a year or so, but are enticed by the higher returns on offer in the market compared with
‘The best time to buy is when trading screens are blood-red’
what they can get in the bank. This is a dangerous game, and one that leads to buying high, selling low and then swearing off stock markets for life.”
Dan Brocklebank of Orbis Investments, another asset manager, said retail investors making their fund selections should be looking for managers who are not put off by negative sentiment surrounding “unloved” companies and have the nerve to buck trends. DIY stock-pickers would also benefit from this stoic approach, he said.
“The best investing strategy in the long term is to avoid popular areas of the market and to look for bargains in unpopular stocks that are available at low prices,” Mr Brocklebank said. “While easy in theory, in order to be able to do this you have to be able to conquer the ‘flight’ response mechanism that makes us reluctant to seek out uncomfortable situations, and the ‘herding’ instinct that makes us do as others do.”