Allow me to introduce you to the world’s unluckiest investor: the kind of person who always misses their connection due to an unexpected flight delay, who always chooses the wrong queue and whose days off are always spoilt by unpredicted rain.
You get the picture. Let’s call him Unlucky Jim.
Jim is a figment of my imagination and I’m going to use him to tell an important story about the key drivers of successful long-term investing. Because what I want to show is how even the unluckiest of investors can succeed if they adhere to Vanguard’s four investment principles – food for thought when markets are weak and investing feels a little scary.
Jim has a long-term goal and wants to grow his capital to fund this goal. He is fully aware that the value of his investments can fall as well as rise, and he also knows that he can reduce his risks by spreading his investments across hundreds of different shares. So he invests via a diversified global fund.
However, Jim’s commitment to investing is patchy. Instead of a regular savings plan, he tends to invest irregular lump sums – as and when the mood takes him, and usually when confidence is high and markets are rallying. And being Unlucky Jim, his timing is lousy – so lousy, in fact, that he has an uncanny habit of buying when markets have just about peaked.
Still, Unlucky Jim doesn’t panic or rush for the exit doors by selling his fund holdings whenever the market moves against him.
What happens next is instructive.
Crisis to crisis
To recount Unlucky Jim’s experiences as an investor I’m going to use a well-known global index that tracks the performance of thousands of different company shares as a proxy for global markets – the FTSE All-World Index1.
(Full disclosure: you can’t invest directly in an index. It has to be done through a fund that tracks the index for you. This incurs a small charge, which is you why should you consider a low-cost index fund, so more of your return stays with you2).
Now, Jim is 50. He started investing when he was 25, in September 1997, to be precise. Refreshed by a late summer holiday and encouraged by that month’s market performance, he invested £2,500 in global shares. Within a month, he was down more than £227 as worries about an economic crisis in Asia spread to markets in the West.
Not a great start, he thought. But he stuck with it and the index recovered, along with his confidence. So much so that by the following July, when he was up more than £250, he added another £2,500 to his investments.
Unfortunately for him, Russia was about to default on its debt, a major US hedge fund was about to go under and markets were about to recoil in shock. Within a month he was down more than £840 overall – or almost 16%.
But, again, he put it out of his mind and was handsomely rewarded for his troubles – until, that is, 2000, at the height of the dot-com bubble, when he doubled his initial outlay and invested another £10,000.
Bubbles being bubbles, the dot-com bubble soon burst. And over the ensuing months, markets tumbled, made worse the following year by the September 11 Twin Tower attacks in New York and subsequent war in Afghanistan, leaving Jim to rue his unlucky market timing.
So much so, that by September 2002, the FTSE All-World Index was down almost half from its previous peak in British pound terms.
Global financial crisis, Covid-19 and the new downturn
But recover, global markets did, and by October 2007 the index peaked again, enabling Unlucky Jim to demonstrate his unique skillset once more by investing another £5,000 that very month.
Could Jim have timed it worse? No, because years of easy credit and rising US house prices were about to unravel, leading to a US subprime debt crisis and growing pressures on the global financial system, epitomised in the UK by the run on Northern Rock bank. Less than a year later, Lehman Brothers was declared bankrupt, unleashing havoc on the global economy.
But, once more, Jim kept his cool and by late 2019, he was sitting on more than £70,000 – three-and-a-half times his total outlay.
Unaware of the coming global pandemic, though, he invested a further £10,000 just days before shares were slammed by the fastest bear market3 of modern times. Not again, thought Unlucky Jim. But it turned out not to be as bad as he had feared as markets quickly recovered. So much so, that by the end of 2021, his hypothetical pot was over £108,000.
Of course, as we all know it’s come down since then due to the three-headed spectre of war in Ukraine, rising inflation and monetary tightening. And Unlucky Jim being Unlucky Jim, let’s imagine he had invested another £5,000 just before the market peak, in December 2021.
If so, he would still have been up 91% by the end of June 2022 on his overall outlay of £35,000, which is still a healthy return.
Time in the market
The moral of the story is that no one can possibly know what lies around the next corner but that a disciplined, low-cost and diversified approach to investing can help even the unluckiest amongst us.
Rather than panic as markets sank and selling out of his position, Jim held his nerve and stayed the course. And in the long run, it paid off for him.
But then, in general, it pays to have a long-term perspective when investing, as underscored by the chart below.
Market downturns barely register from a long-term perspective
Source: Vanguard analysis based on the MSCI World Index from 1st January 1980 to 31 December 1987, and the MSCI AC World Index thereafter. Both indices are denominated in GBP. Our count of corrections excludes those that turn into a bear market. It also excludes the particularly sharp but short-lasting correction seen in early-2020 during the first wave of Covid-19. Data as at 31 December 2021.
Remember also that you can’t possibly be as unlucky as Jim. After all, the Covid 19 rebound peaked late last year and global markets have pulled back from this level so far in 2022.
With a regular investment plan, you can also load the dice further in your favour by averaging out the price you buy into the market.
David Hsu contributed to this article
1 Using monthly index price data, on a total return basis, with dividend payments reinvested.
2 For example, the ongoing charge on the Vanguard FTSE All-World UCITS ETF is just 0.22% a year.
3 A drop of 20% or more from a previous peak.
Investment risk information
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