Welcome to Finance and Fury. I’ve talked to a lot of people over the past few weeks that have concerns to varying degrees – ranging from fallout situation to seeing short term volatility in investments

The most important thing to do is avoid making rash decisions – In this episode – I want to look at some long-term data and explore the reason that holding the course of an investment strategy works better long term than trying to guess that will happen in the short term


I am sure many of you listening are familiar with the Keep Calm and Carry-On meme – many different iterations to this

  1. This originated from a propaganda poster produced by the British government by the Ministry of Information in 1939 in preparation for World War II – it was a poster intended to raise the morale of the British public, threatened with widely predicted mass air attacks on major cities.
    1. Leading up to WWII – British planners estimated the effects a German bombing campaign would have on England – it was estimated that London would be flattened, 200,000 Brits would die in the first barrage alone, and millions would go insane through shell shock – a condition that was coined after WW1 – what we would call PTSD today – or post-traumatic stress disorder
    2. The Blitz did turn out to be pretty bad as the bombing went on for months
    3. But thankfully the worst-case projections did not come to pass. People generally did not lose their mind, or suffer PTSD – social solidarity didn’t decline but in many cases was enhanced. During the months of the bombings, war production actually increased.
  2. Not to diminish this – my grandparents lived as kids through this – tell us stories of them turning out lights at night to not be a target for bombing – The first few days were a shock – people had never experienced anything like it – But after a few days – it became almost part of life – People kept calm and carried on –
  3. What if they hadn’t – if they had frozen and retracted from life? Nothing would have gotten done – it would have created a worse outcome


What does this have to do with investing – that the longer you invest, the more downturns become part of your investment journey – the more comfortable you become with short term volatility –


So how do you overcome fear and focus on the plan? – Remember Four key facts when your limbic system is getting bombarded – making you think you should sell everything – Need to take your own situation into account and your own propensity for losses – none of this is advice – but general information


  1. First – Share market investing is very risky in the short run but less so in the long-run – ironically unlike cash when inflation adjusted
    1. Using almost 100 years of data on the US Large Cap shares – comparing this to the cash rate – based on a 30-day treasury bill – Data from January 1926-January 2022 – Source: Morningstar
    2. Timing is everything – not in the short term – but long term – it is about the time in the market – not trying to guess and time the market
    3. Breaking time periods down – investing in the share market versus holding cash – when adjusting for inflation – what is your chance of having a negative return
      1. 1-month – Cash and shares are about the same – sitting at 41% – remember, with inflation, cash can provide a negative return if interest rates are below inflation
      2. 3-months – Cash is 40% and shares are 36%
  • 12-months – Cash is 42% – shares are 29%
  1. 3-years – Cash is 45% and shares are 24%
  2. 5-years – Cash is 45% and shares are 23%
  3. 10-years – Cash is 44% and shares are 14%
  • 20-years – Cash is 33% and shares are 0%
  1. So – if you invested for a month – you would have lost money 41% of the time in inflation-adjusted terms which is the same as what cash would have provided – but if you had invested for longer – let’s say for 12 months – the odds of being ahead start to shift in your favour when compared to holding cash – where shares would have been down 29% of the time but cash would have been at a loss 42% of the time – but is important to remember that a 12 month period is still a very short timeframe when it comes to investing in shares – you should be willing to be in it for the long haul – as the chance of loss drops to 14% after 10 years when adjusted for inflation but cash after 10 years is still sitting at 44% in real terms
  2. What is interesting to note that in inflation-adjusted terms – your chance of losing money when holding cash over 10 years never really changed – you would be positive around 60% of the time, but negative around 40% of the time
  3. Losing money over the long run can never be ruled out entirely – and if it does occur would clearly be impactful on your portfolio returns – But in contrast – cash may not be the safe harbour when inflation is accounted for – as all cash savers know, recent experience has been even more painful with no interest returns and higher levels of inflation
  1. Second – The market has dropped by more than 10% in more years than they haven’t over the past 50 years – to be precise markets have dropped by 10% or more in 28 years out of 50
    1. but unsurprisingly – markets are still ahead over the long term – obviously past performance is no indicator of future performance
    2. Over the last few weeks – global share markets, particularly tech companies in the US have fallen by more than 10% from their peak
      1. Whilst 10% may feel like a big fall – If you have $100k it is losing $10k in a month or so which isn’t nice to see – but it’s actually a regular occurrence.
      2. The US market has fallen by at least 10% in 28 of the past 50 calendar years i.e. more often than not.
    3. Since 1970 – this includes 1973 by 25%, 1974 by 38%, there were 7 more occurrences of losses between 10-20% from 1976 to 1984 – moving forward to the last decade – drops of more than 10% occurred in 2012, 2015, 2016, 2018 and 2020 – Despite these regular bumps along the way, the US market has returned 11% a year over this 50-year period overall – as in many of these years the markets ended the calendar year in a positive position – despite losing more than 10% in a few months within the calendar year
      1. The risk of short-term loss is the price of the entry ticket for the long-term gains long term growth that share market investing has historically provided
    4. Third – Selling after a big fall rarely works out in your favour – you should buy instead of sell – or at least hold
      1. While the market hasn’t fallen too much so far in the current correction phase – it isn’t out of the realm of possibility that further volatility and declines in the market occur – but if that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to sell everything and run for the safety of cash – seeing losses hurts – the more the loss the more the hurt
      2. Historically though – selling everything after a major correction would have been the worst financial decision that you could have made – and lock in losses and make it very hard to recoup the initial losses
      3. Looking at some historical data – if you have sold every share you owned in 1929, assuming you were invested in the US share market, after the first 25% fall before the Great Depression broke out – would have had to wait until 1963 to get back to breakeven. This compares with breakeven in early 1945 if they had remained invested in the share market
        1. remember, the share market ultimately fell over 80% during this crash – so shifting to cash might have avoided the worst of those losses during the crash – but still resulted as the worst long-term strategy
      4. Looking at the Dotcom bubble cash in 2001, after the first 25% loss, an investor would find their portfolio still underwater today the same with the cash of 2008 – whereas holding onto the shares would have seen an investor recoup their losses in 4.1 and 4.8 years respectively
      5. Looking at the average times since 1877 to recoup losses after a 25% decline – if you held your shares, this would result in recouping your losses over 4 times faster then selling to cash and waiting for a recovery – which is inevitably misses if you are on the sidelines
      6. The best strategy in my opinion is to take advantage of a loss of this magnitude and purchase more of the assets that have fallen – this can result in further losses, but you should be investing for the long term – this brings up the last point
    5. Periods of fear have been great opportunities to invest in the share market – whereas trying to guess the market has underperformed
      1. In the share market – there is a decent measure of fear with investors – and this can be found in the VIX index – this measures the volatility of the market – the higher this reaches – it is a measure of the amount of volatility traders expect for the index during the next 30 days – so generally this means that there are major selloffs occurring or anticipated in the market – which means fear is high.
      2. It has recently risen to a level of 32 on the US index and 19 on the ASX – well above its average since 1990
      3. Higher levels of volatility, rather than being a time to sell, can present buying opportunities – historically, periods of heightened fear have been when the VIX index is elevate –
      4. Looking at the past 30 years of data – On average, the S&P 500 has generated an average 12-month return of over 15% if someone invested when the Vix was between 28.7 and 33.5 – And more than 26% if it breached 33.5.
      5. Obviously past performance is no indicator of future performance – but looking at the data – generally returns are 10%+ p.a. when the VIX is between 0-19 –
        1. Between 20 to 28 – returns have been sub 10% on average – but once the VIX reaches 29 or more, then returns have been 15% – if more than 33- returns have been 25% –
      6. All of this data is based of Schroders analysis – Which looked into a switching strategy – that looked at cashing in on a daily basis whenever the Vix entered this top bucket of more than 30, then shifted back into shares whenever it dipped back below. This approach would have underperformed a strategy which remained continually invested in shares by 2.3% a year since 1991 (7.6% a year vs 9.9% a year, ignoring any costs).
      7. Following this strategy – of switching to cash when shares became volatile and then switching back when the market calmed down in terms of volatility – an investment of $100 in the continually invested portfolio in January 1990 would have grown to be worth twice as much as $100 invested in the switching portfolio – $2,332 (9.9% p.a.) versus $1,157 (7.7% p.a.)
      8. As with all investment, the past is not necessarily a guide to the future but history suggests that periods of heightened fear, as we are experiencing at present, have been better for stock market investing than might have been expected.
      9. When others are fearful – be greedy – if there are high levels of volatility – this can present itself as a buying opportunity


In summary – Keep calm and carry on – The chances of nuclear war are low – and if one does occur, having an underground bunker is the best investment – worrying about any short-term volatility seems silly in comparison – but it is important to remember the four key facts of markets –

  1. Shares have outperformed cash in the long term when adjusting for inflation
  2. Markets are volatile and drop more than 10% in a calendar year more often than they don’t – in the past 50 years this has happened 28 times out of 50
  3. Selling shares after a drop of 25% or more is the worst decision you can make in the long term when compared to holding onto the shares
  4. When others are fearful and volatility is high – it is the time to look at holding onto the shares – and if you have the capacity – purchase more

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