Even the market commentators have given up - "I've stopped looking". Is that what it's going to take? A bloodbath? When it gets all too hard, you give up? Just like that? Isn't this the time when you do your best work? Or will you tell us what we should have done after the fact? I'm genuinely curious. No, actually I'm not. I already know the answer. The question is rhetorical.
The last decade has been one of the strongest in financial markets, in fact, it's the longest period without a fall for five successive weeks since 2011. We have just ended this streak. In the 83 years between 1928 and 2011 we had 61 runs of five or more weekly declines in a row, so one every year and a third on average according to DB. I guess we can say the last decade has been the exception rather than the norm. I can show you so many charts that validate this. But what do you care? You just want the good time to roll without taking the risk? I'm sorry, it doesn't work this way. There is no free lunch.
And just like that, investor's are bracing for a hard landing, with the US Volatility Index (VIX), often referred to as the fear gauge, rising and is now sitting at elevated levels. I plotted the index in the chart below and highlighted the most extreme levels of fear - the GFC and COVID.
Sure it's elevated, but nowhere near the levels we saw during the GFC or COVID. What's interesting however, is what this tells us about future expected returns. Let's take a look at how the stock market performs in the following 12 months through different ranges of market fear.
VIX Level / Following 12 month stock market return (on average)
<15 / 10%
15-20 / 10%
20-25 / 4%
25-30 / 7.5%
30-35 / 17.5% <--- You are here
35-40 / 22%
>40 / 33%
Interestingly, since 1990, the stock market has tended to gain more during the 12 months following a high VIX reding. This doesn't surprise me. History is littered with examples of how the average investor get the future wrong. You don't need to cast your mind too far to be reminded of this.
The last few days have given investors both positive and negative daily extreme's - up 3% in one day, down 5% in another. Yet during that same week, the market ended the week down 0.18%. If you were watching what was going on each day on the news, social media, and so on, it would have been an emotional rollercoaster. Yet for those investors who checked their accounts at the end of the week, it was as if nothing happened. What would you have done differently anyway? Get out one day, back in the next? The trouble with such market timing strategies is the the best days are clustered with the worst down days, and vice versa. And therefore trying to time thee movements is near impossible. In fact, studies show that the average investor has returned about 2.9% pa for the last 20 years, and the stock market has returned 7.5% pa - a 4.5% pa deficit. And all you had to do was sit in your seat seat.
It's really hard, believe me, I know. Most financial pundits play this game like they're at the racetrack. You can go through the pain too, or you can choose to widen the lens and play a game of much stronger probabilities. One that historically has given you 100% odds of seeing positive returns. - the long view.
After three years of double digit returns (2019 +31%, 2020 +18%, 2021 +29%), does a 10% decline really matter that much? If it does, you probably have way too much money in the stock market. It's times like this that having a game plan makes all the difference. Take the long view. You won't regret it. It's also much kinder to your heart.
My colleague Matt Rigby and I talk more about this in last week's The Wide Lens podcast.
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