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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 [1]

[Click to enlarge the revelation]

Source: J.P. Morgan Guide to the Markets UK [2], 31 March 2020, p.92 (updated quarterly).1 [3]

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 [4] 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 [5].

It’s beaten on the chart only by the -37% Black Monday Crash of 1987 and the -43% delivered during the Global Financial Crisis [6] 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:

JP Morgan calculates the average intra-year drop is -15%. That shows 100% equities is no place for the nervous [7] 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:

For new investors [8], 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 [9] 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 [10]

Yet even that pales against the sickening -73% inflicted by the UK bear market of May 1972 to December 1974.4 [11]

Forewarned is forearmed

Why am I heaping this misery on you when we’ve possibly only just binged on the first few episodes [12] 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. [ [17]]
  2. Drawdowns are the decline in the price of an investment between its high and its low over a given period. [ [18]]
  3. Barclays Equity Gilt Study, real return including dividends. [ [19]]
  4. Sarasin Compendium Of Investment 2020, p.167. [ [20]]