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The stock market is wilder than you think

This is one of the most revealing stock market charts I’ve ever seen. It shows just how rough the ride is when you invest in equities – in this case the FTSE All-Share index:

FTSE All-Share intra-year returns 1986-2020

[Click to enlarge the revelation]

Source: J.P. Morgan Guide to the Markets UK, 31 March 2020, p.92 (updated quarterly).1

Most investing books show only calendar-year returns when they explain how risky the stock market is. You can see these calendar year returns for the All-Share represented by the grey bars in the graph.

They go up and down like a lift operated by Mad Max. But even these violent mood swings are mild in comparison to the worst drawdowns2 contained within each year, picked out in red dots.

Those plunges really will make your stomach drop.

Market mania

What do 34 years of stock market swings and roundabouts tell us?

Firstly the -36% fall we saw through March 2020 is historically horrendous.

It’s beaten on the chart only by the -37% Black Monday Crash of 1987 and the -43% delivered during the Global Financial Crisis in 2008.

The main lesson though is that double-digit losses are a regular event, bedevilling investors in UK equities in more than 75% of the years covered.

On top of that:

  • A market correction (-10% to -19%) hit home more years than not (18 out of 34 years).
  • We entered bear market territory (-20% or worse) in nearly 25% of all years (eight out of 34 years).
  • Peak-to-trough losses were -30% or greater in five out of 34 years (that’s 15% of all years).

JP Morgan calculates the average intra-year drop is -15%. That shows 100% equities is no place for the nervous and attentive, even though the market ended up higher in a given year some 70% of the time.

Happily the years that saw double-digit declines still ended up in positive territory 44% of the time (15 out of 34 years), too.

Down but not out

Even truly terrible drawdowns can reverse quickly. 1987’s -37% decline transformed into a 4% gain by New Year’s Eve.

I can’t see that happening this year, and it didn’t happen during any of the other 30%+ down years either, but who knows?

Many other big losses rebounded into big gains:

  • 2009’s 23% down snapped back to 25% up.
  • 1999 dived 11% but rose 21%.
  • 1989 dropped 14% but climbed up 30%.

For new investors, this chart provides a more realistic picture of what you’re up against than you’ll get by just looking at the end-of-year tally. Equities are a much tougher place to be than I realised when I began investing, when seen through the lens of intra-year declines.

For example, the most brutal calendar year for UK equities was an off-the-charts -58% delivered in 1974.3

Yet even that pales against the sickening -73% inflicted by the UK bear market of May 1972 to December 1974.4

Forewarned is forearmed

Why am I heaping this misery on you when we’ve possibly only just binged on the first few episodes of an all-time equity horror show?

Partly because the graphic shows some good news. Things can – and often do – turn around more quickly than we think.

But also to be honest about the bad news. The stock market is a wilder place than many give it credit for.

Chalk it up as yet another reason to invest passively, to be diversified, and to only check your portfolio infrequently, lest you’re frightened out of it…

Take it steady,

The Accumulator

  1. Nominal returns, dividends not included. []
  2. Drawdowns are the decline in the price of an investment between its high and its low over a given period. []
  3. Barclays Equity Gilt Study, real return including dividends. []
  4. Sarasin Compendium Of Investment 2020, p.167. []
{ 18 comments… add one }
  • 1 Stephen Almond May 12, 2020, 12:26 pm

    It’s a pity they didn’t show the corresponding intra-year gains!

  • 2 Boltt May 12, 2020, 3:09 pm

    Quick question – I’m looking to buy some Axa shares.

    I can buy them on the French stock market or the London STock exchange. The bid offer spread seems a little different on each – but what are pros and cons of buying French shares on the UK STock exchange v the native one?


  • 3 Amit May 12, 2020, 8:29 pm

    From an overall portfolio perspective, I wonder if high short term volatility makes Vanguard-style cashflow based rebalancing in its multiasset funds (Lifestrategy and Target Retirement) more fit for purpose than annual or threshold based rebalancing in DIY portfolios.

  • 4 Craig Lawrance May 13, 2020, 7:27 am

    Volatility is your best friend during the earning years. In a declining or bruised market, every contribution of (say £100) buys you more units than last month. Carry on investing, keep your allocation between equities to bonds to match risk-profile. With no volatility you’ll have a much smaller pot come your retirement.

  • 5 LukeM May 13, 2020, 9:17 am

    This again shows the problem/danger of talking about average annual returns. Working out compound annual growth rates in retrospect is a useful tool for predicting portfolio sizes in the future, but for the beginner it’s dangerous if you think compounding like this is what happens in practice. I even see people talking about ‘compound interest’ in relation to shares.

  • 6 xxd09 May 13, 2020, 9:31 am

    As a retiree this graph shows the necessity of an “ anchor to leeward “
    What you use for this is for debate but bonds are still the winners
    The nightmare scenario is entering retirement/drawdown at the period of one of these graph drops-your portfolio will not/might not recover if the equity side of your investments is your main source of expenses (unless you are Warren Buffet with a massive portfolio)

  • 7 MrOptimistic May 13, 2020, 11:19 am

    That graph is a bit of an eye-opener. Personally tending towards more US Treasuries in one hedged form or another and strategic bond funds rather than adding to equities just at the moment (age a big factor).
    Thanks for the article as always.

  • 8 Ecomiser May 13, 2020, 12:15 pm

    @xxd09 You’re talking about sequence of returns risk, and it would certainly be a problem if you needed to sell everything to buy, say, an annuity on a pre-specified day that happens to to be at the bottom of a drop. But for someone with a suitable cash buffer and a bit of flexibility over dates, it would be possible to wait a while to near the next high, in less than a year.
    The volatility is also why I refer to get my income from dividends, rather than mechanically selling a proportion of my portfolio on given dates. Yes, I know dividends are going to be thin in the coming year, but that is unusual.

  • 9 Naeclue May 13, 2020, 12:42 pm

    @Ecomiser, whilst I agree about dividends usually being less volatile than capital values, I would not see that as a good reason to fill a portfolio with high yielding shares, something some people think is a good idea.

    My approach (new approach) is to just take what the market provides, around 2% in dividends, and then occasionally sell equities when it is necessary to top up the cash buffer. Otherwise, if running a diversified balanced portfolio, just top up the cash buffer during annual rebalancing. If equities are down a lot at the time, the chances are you will be buying rather than selling. I ran a 60/40 portfolio for many years and found selling bonds to buy equities was very unusual compared with the other way round.

  • 10 Vanguardfan May 13, 2020, 1:21 pm

    Is my cash buffer big enough I wonder? Interesting times…

  • 11 xxd09 May 13, 2020, 1:30 pm

    Economiser-it’s all in the meaning of words as always
    Suitable cash buffer-2 years expenses usual -probably not enough if a crash occurred at the wrong time
    Flexibility over dates of retiral-not always an option offered by employers or planned for by retirees-could be badly caught out
    Crashes are often over by a year but not always-up to 3 years plus possible
    You only get one chance at retirement-you have to get it right!
    Dividends and/or Capital growth seem to me to be the different sides of the same coin
    I run Accumulation units and sell “chunks” of bonds or equity as required
    Once a year transaction often enough -simple and as someone in a previous post said it is mainly equity as one would expect -that is where the growth of the portfolio comes from

  • 12 AJP May 13, 2020, 1:38 pm

    Be great if you did a post reviewing Ray Dalio’s new articles and your thoughts

    The Changing World Order

  • 13 Seeking Fire May 13, 2020, 5:00 pm

    Naeclue….There is an awful lot to like about your strategy imo. Do you mind me asking your age range if possible.

    AJP – I don’t know v much about Ray Dalio beyond the press. Mind you his main fund did lose pretty badly in March (!), with a performance which was considerably worse than many other commentators on this board so I think one should take his words with a ladle of salt…particularly when he’s an active asset gatherer and so paid to say this stuff. even though btw a lot of what he says to me does make some sense.


  • 14 The Accumulator May 13, 2020, 6:48 pm

    @ Amit – there’s tons of conflicting research out there. Ultimately you can find whatever answer suits you. The best conclusion seems to be that it’s a total crapshoot, you’ll only know the right answer in retrospect and a reliable balancing bonus is a myth.

    @ Stephen Almond – I thought that too. But on the other hand where’s the fun in that? Like watching a horror movie starring the Teletubbies 🙂

    @ LukeM – Totally agree. Instead of showing new investors those ‘you can’t lose over 20 years’ graphs, everyone should be shown this one marked THIS IS RISK!

    @ Economiser – the other problem is if you’re hit by the -30% tsunami, panic and sell out. I know people who’ve done that this time around.

  • 15 Ecomiser May 13, 2020, 8:52 pm

    @Naeclue. I’m just following the lead of The Greybeard, of this very site, and taking income from a selection of Investment Trusts. I don’t fancy hanging my retirement on a handful or so of individual companies.

    I had no choice over finishing work, but lived off my ISA income and cash stash for six years before drawing a pension. That’s what I meant by having flexibility.
    Yes some crashes last years, but the current subject is that graph of intra-year drawdowns, which are nasty if you happen to be selling then, but mostly recover quickly.

    As said, I prefer to take income, and hang on to the shares/units. Someday I might need to sell, but currently I intend buying while there’s something of a sale on.

  • 16 Craig Lawrance May 14, 2020, 6:45 am

    @Accumulator re : you know some who saw the -30% drop, panicked and cashed out. The bigger question is how do these folks EVER go back IN?

  • 17 James Greig May 16, 2020, 9:32 am

    Well at least I moved all of my money out of RateSetter last year, one less thing to worry about! Just saw a tweet from someone who has almost all his life savings with them and doesn’t know when his withdraw request will come through. Oooooft.

    Similar to comment above, I wonder what the authors of all the “I’m cashing out” posts I saw on Reddit last month are thinking now…

    Much more time to think about my retire-slightly-early plans of late (I’m almost 40, aiming for a change of pace/profession around 50 but hopefully starting a family inbetween somewhere).

    The stocks/bonds article was interesting, as someone with fairly rudimentary knowledge about investing I need to do some further reading here. Especially as I’m currently all in on LifeStrategy 100… perhaps a switch to LifeStrategy 80 would be prudent now the usual uncertainties are even more uncertain.

  • 18 The Accumulator May 16, 2020, 12:07 pm

    @ Craig – exactly. If you panic on the way out it follows that you likely have no idea about when to get back in. Cue cautionary tales of those ageing in place, too frightened to return to equities, the cash pile whittled away by inflation, year after year after year.

    @ James – interesting decade for you coming up! The need to diversify out of equities is definitely gonna start pinging more urgently on your life radar.

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