Investing through bear markets

Following the intense market downturn of the past few weeks, many investors will be wondering about the prospects for their portfolios. However, new data from the Association of Investment Companies (AIC) proves the worth of the old adage that it’s time in the market, not timing the market, that counts.

Global financial crisis

If an investor had invested £1,000 in the average investment company in October 2007, when the FTSE 100 was near its peak before the global financial crisis, that investment would have fallen to £587 by February 2009. But that same investment would be worth £2,115 today¹, more than double the amount invested – and this is after the market crash of last month.

Dot-com bubble

It’s a similar story with the bursting of the dot-com bubble in 2000. An investment of £1,000 in March 2000, near the height of the dot-com boom, would be worth £3,665 today, a 267% return. Remarkably, this 20-year period includes the dot-com crash, the global financial crisis, and the market falls of the past few weeks.

Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Markets have just gone through their worst quarter in more than 30 years and whilst there’s been a partial recovery over the past fortnight, most investors will have suffered significant losses. Whilst there’s no telling how long the COVID-19 emergency and current bear market will continue, it can be reassuring to look back at previous crashes. The bursting of the tech bubble and the global financial crisis saw huge falls in markets, similar to this recent crash. However, investors who were able to stay invested or even invest during the downturn would have been richly rewarded over the long term.

“No-one has a crystal ball, but these returns show the power of long-term investment and why it can often pay to have one eye on your portfolio and the other on the horizon.”

Lump sums versus regular saving: it’s time in the market that counts

The data suggests that a lump sum investment made at the worst possible time outperforms drip feeding over the long term. Clearly, not everyone has a lump sum and regularly investing each month is an effective way of building up a larger pot over the years, as well as removing the worry of timing the market.

For example, a £50 monthly investment in the average investment company from October 2007 to March 2020 (£7,550 invested) would now be worth £12,319 (end March 2020). However, a lump sum of £7,550 invested over the same timeframe – right before the global financial crisis led to losses of 41% for the average investment company by February 2009  – would now be worth £15,971.

The same applies if you take the peak of the dot-com bubble as the starting point. Investing £50 a month in the average investment company from March 2000 to March 2020 (£12,100 invested) would have grown to £32,285 today, whereas £12,100 invested as a lump sum over the same period would now be worth £44,346.

Investment company performance through bear markets

Performance is share price total return of the weighted average investment company excluding VCTs and 3i, based on month-end data. Red columns represent bear markets, white columns show total returns from the beginning of each bear market to 31/03/2020. Source: AIC/Morningstar.

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Notes

1. Performance is share price total return of the weighted average investment company excluding VCTs and 3i with investments made on the first business day of the month and returns calculated to the relevant month-end. Source: AIC/Morningstar.
2. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. As at the end of February, the AIC had 362 members and the industry had total assets of approximately £196 billion.
3. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.
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