I fondly remember “Don’t panic” being the catchphrase of Lance-Corporal Jack Jones in the popular 1970s sitcom Dad’s Army. ‘Jonesy’ would shout this loudly at moments of impending danger, while running round in a frantic panic himself.
While Jonesy wasn’t exactly the best Lance-Corporal, he would make an even worse investor – if volatility is the equivalent of ‘danger’ for the markets, the ability to stay calm and look at the big picture in periods of such volatility can garner excellent opportunities for the long-term investor.
Global risk appetite
While today’s rally is welcome, it’s still been a brutal couple of weeks for equity markets – however let’s try to look calmly at the big picture through a long-term lens.
Credit Suisse publishes a daily ‘global risk appetite index’ comparing the performance of risky vs less risky assets (feel free to get in touch if you want more details about its construction). As the chart below shows, we’re now back in ‘panic’ territory for the first time in nearly five years – however, as with most bouts of extreme market volatility, out of the maelstrom opportunities can and do emerge for the long-term investor.
I’ve taken each of the last four panic bottoms, and using MSCI indices tracked the performance of major equity markets following these bottoms, over three and five years.
As the above chart shows, it’s clear that equities have tended to perform strongly post periods of investor panic.
We’re (probably not) doomed
Another Dad’s Army favourite, Private Frazer, would often proclaim “we’re doomed!”. Although recent market movements have hinted at impending doom, based on historical evidence I believe that doom will most likely be averted.
With the caveat that it’s very hard to time exactly when the end of the panic will be, it’s important to calmly recognise that historical periods of investor panic have tended to throw up great entry points for the long-term investor.
The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.