The Year Investors Endured

12 months ago Saturday, the MSCI World Index hit its final all-time high of a bull market that began way, way back in March 2009.^[i] What markets endured over the next few weeks was awful, as was the pandemic’s toll on humanity—which we are still living even now. Yet despite all the terrible things that have happened, the MSCI World is now up 8.8% since that prior peak, which we think illustrates the timeless value of maintaining discipline and a cool head if you are investing for long-term growth.^[ii]

The list of struggles and tragedy endured worldwide over the past year is overwhelming, to say the least. Beyond the pandemic and its horrible death toll, we had wildfires, tornadoes, floods and deep freezes. Locusts wiping out harvests throughout Africa. Deep political divisiveness. Societal unrest. These events have touched many lives, and as a society we have learned many lessons from them. But for investors, we think there is one big takeaway: Global equity markets rose as the vast majority of these troubles unfolded.^[iii] Even the pandemic’s worst effects, from the mounting death toll to the deep economic contraction resulting from lockdowns, occurred after global equity markets bottomed in mid-March.^[iv] We think that sharp downturn was markets’ way of anticipating the economic trouble to come. Therefore, keeping a forward-looking perspective—and staying disciplined—was generally key to capturing the recovery and reaping the cumulative gains since 2020 began.

Saying that in hindsight is one thing. Doing it at the time, in the heat of panic, was likely exceedingly difficult for the vast majority of readers. Between 20 February and 16 March, the MSCI World Index plunged -26.1%.^[v] Likely adding to the panic was the handful of sheer vertical daily drops—like 9 March’s -7.3%, 12 March’s -7.4% and 16 March’s -8.6%.^[vi] Like pretty much any bear market and early recovery, big swings clustered together, adding to the sense of panic.^[vii] (A bear market is a broad equity market decline of -20% or worse with an identifiable fundamental cause.) While this bear market’s suddenness was unusual, our analysis of historical returns suggests volatility coming in clumps is normal in a bear market year. But that heightened volatility cuts both ways, as bear market years also tend to feature more big up days than pure bull market years—particularly in calendar years when a new bull market began midstream.^[viii] Many of those big up days cluster around the bear market’s lowpoint, which in our view makes it crucial to be invested when a bull market begins. This is why we think selling after a big decline is among the most devastating errors a long-term growth investor can make.

That was among the chief risks investors faced last year, in our view. When equity markets plunged in the winter, from our vantage point, the general mood throughout the financial world was shellshock. If this rendered investors frozen, then it kept them invested during the downturn, likely causing no small distress to many. But it also meant these people were invested when the recovery began, theoretically positioning themselves to ride the rebound. However, realising that potential required staying invested as historically awful economic data came out in the spring and summer. While the death toll mounted. As political unrest gripped several cities in Britain and Europe, all the way through the chaotic conclusion to a tense US election capped off by the Capitol riot on 6 January.

If you managed to stay cool and disciplined throughout that, we think you deserve a moment to congratulate yourself. If you didn’t, then don’t get discouraged. There will almost surely be more bear markets, and we think what matters is that you don’t erase bad decisions from your memory. Rather, acknowledge and learn from them. Take the lessons you learn and put them to use next time and those that follow it. If your big lesson was that equity markets are forward-looking, and they can recover even as bad data roll in and unemployment climbs, take that with you. If your big lesson was that widely discussed fears don’t hurt markets as hard as everyone warns they will, then take that with you. For if we know one thing about the world, it is that bad times come along with the good, and 2020 won’t be the last test of investors’ mettle.