So here we are, near 10 years after the Global Financial Crisis (GFC) and experiencing the longest ‘bull market’ in history – surely it’s going to end … surely?  The answer is ‘yes’, it will, but should that impact upon your investment decisions?

Let’s take a look at some key facts about investing that will hopefully alleviate some concerns that you may have about where we currently are situated in the ‘investment cycle’.

Whilst the above illustrates the share market movements in the US, there has been a strong correlation over time between the US share market and the Australian share market and as such, the darker grey areas representing market corrections in the US would also align (to a large degree) with corrections in the Australian share market. 

What this graphic shows is that share market ‘corrections’ (being a decline of 10% or more) are quite commonplace and are often over before you even know it with only around 1 in 5 corrections turning in to a ‘bear market’ (a period of two or more months of declining share prices).

The problem that has confounded investors for so long is knowing when a fall in the share market is a somewhat common ‘correction’ or is it the start of a more serious but less common ‘bear market’?

And the truth of it is that nobody can predict consistently whether the market will rise or fall in the short term.

It would be nice to think that there are ‘investment gurus’ out there that can predict market movements but the fact is that this is just not the case – at least not consistently.  It is difficult to observe any rhyme nor reason to these annualised returns:

What the above illustrates is that it is nearly impossible to predict the market performance in any given year however history tells us it will be up more than it is down.  While it may be tempting to take a tactical approach to miss or limit those downside movements, staying the course will see you rewarded over time.  In fact, as will be shown further below, trying to miss the downside poses a real risk and can materially detract from your overall performance in the (more likely) event of getting it wrong.

The media (and many fund managers) suggest that they are ‘in the know’ with quotes like these that I’m sure you have been exposed to over the years:

• ‘Asian Economic Outlook “Bleak”’, 30 March, 2009; CNN
• ‘Housing Market a “Time Bomb”’, 15 June, 2010; The Australian
• ‘Stock Markets Face “Bloodbath”’, 26 Aug, 2010; Telegraph UK
• ‘Europe’s Debt Crisis Puts Australia at Risk’, 10 Nov, 2011; News.com.au
• ‘Australia May Be on the Brink of a New Collapse’ 18, Aug, 2013; Guardian
• ‘Are We Facing Another Financial Crisis?’, 18 Nov, 2014; The Conversation
• ‘Australia Faces 50% Chance of Recession By 2017’, 25 March 2015; SMH
• ‘Why China’s Stock Market Meltdown Could Hurt Us All’, 8 July, 2015; Time
• ‘Brexit to Bring Recession and Contagion’, 27 June, 2016; Business Insider
• ‘A Trump Win Would Sink Stocks’, 24 Oct, 2016; CNN
• ‘Storm that May Cause the Next Crash is Brewing’, 16, Oct 2017’; The Street

The fact is however that this is all just ‘noise’ designed to do one thing; to get your eyeballs to hover over the advertising that surrounds the ‘news’ article. It is the paying advertisers who are the real customers of the media, not you who read or watch the news.  So, the bigger the headline, the bigger the advertising sales.

So what can we do, as investors, to minimise the risk of inevitable market falls?  Investing comes with risks but having a strategy in place for market downturns is critical and you need the discipline to follow it. 

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insight or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” 

(Warren Buffett – the “Oracle of Omaha”)

The fact is, once a bear market ends, the following years can provide some significant investment return ‘rebounds’:

And these crucial market gains often occurring quickly – miss these gains, and you may as well have stayed in cash:

Unfortunately, nobody rings a bell at the top or the bottom of market cycles so the only way to access the critical market ‘up’ days is to stay invested otherwise your investment returns can be slashed – there would be nothing worse than riding the market all the way to the bottom only to then switch to cash and miss the upside returns.

For some, it can be hard to hold your nerve and stay invested (let alone invest more) during times of market volatility as emotions are high and it is human nature to ‘do something, anything’. 

APC’s advice is to accept that markets will rise AND fall and remain committed to the strategy that was put in place during less emotional times.