Perspective

The data which can help you keep a cool investing head in a crisis


We first published this research in the days following Russia’s invasion of Ukraine earlier this year. Since then, markets have continued to fall as investors focus on the longer-term outcomes of the conflict and how these play into other concerns including sharply higher inflation, rising interest rates and a potential recession.

In this updated version of the original article we suggest our core arguments continue to hold true.

1. Stock market investing is very risky in the short run but less so in the long-run – unlike cash

Using almost 100 years of data on the US stock market, we found that, if you invested for a month, you would have lost money 40% of the time in inflation-adjusted terms i.e. in 460 of the 1,153 months in our analysis.

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However, if you had invested for longer, the odds would shift dramatically in your favour. On a 12-month basis, you would have lost money slightly less than 30% of the time. Importantly, 12-months is still the short-run when it comes to the stock market. You’ve got to be in it for longer.

On a five-year horizon, that figure falls to 23%. At 10 years it is 14%. And there have been no 20-year periods in our analysis when stocks lost money in inflation-adjusted terms.

Losing money over the long run can never be ruled out entirely and would clearly be very painful if it happened to you. However, it is also a very rare occurrence.

In contrast, while cash may seem safer, the chances of its value being eroded by inflation are much higher. And, as all cash savers know, recent experience has been even more painful. The last time cash beat inflation in any five-year period was February 2006 to February 2011, a distant memory. Nor is that something that’s expected to change any time soon.

2. 10%+ falls happen in more years than they don’t – but long term returns have been strong

By late May US equities had fallen by approximately 19% in 2022.

In the US, 10% falls happened in 28 of the 50 years prior to 2022. In the past decade, this includes 2012, 2015, 2016, 2018 and 2020.

More substantial falls of 20% occurred in 8 of the 50 years (that's roughly once every six years – but if it happens this year, that will be twice in the past three, in 2020 and 2022).

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Despite these regular bumps along the way, the US market has returned 11% a year over this 50 year period overall.

The risk of near term loss is the price of the entry ticket for the long term gains that stock market investing can deliver.

3. Bailing out after big falls could cost you your retirement

While the market hasn’t fallen too much so far, further volatility and risk of declines cannot be ruled out. If that happens, it can become much harder to avoid being influenced by our emotions – and be tempted to ditch stocks and dash for cash.

However, our research shows that, historically, that would have been the worst financial decision an investor could have made. It pretty much guarantees that it would take a very long time to recoup losses.

For example, investors who shifted to cash in 1929, after the first 25% fall of the Great Depression, 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 stock market. And remember, the stock 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 came out as by far the worst long-term strategy.

Similarly, an investor who shifted to cash in 2001, after the first 25% of losses in the dotcom crash, would find their portfolio still underwater today.

The message is overwhelmingly clear: a rejection of the stock market in favour of cash in response to a big market fall would have been very bad for wealth over the long run.

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4. Periods of heightened fear have been better for stock market investing than might have been expected.

A combination of the war between Russia and Ukraine, soaring inflation, and tightening monetary policy, have sent the stock market’s “fear gauge”, the Vix index, higher. The Vix is a measure of the amount of volatility traders expect for the US’ S&P 500 index during the next 30 days.

It reached a level of 31 on Wednesday 19 May, well above its average since 1990 of 20, and steeply higher than its start of year level of 17.

However, historically, it would have been a bad idea for investors to sell out during periods of heightened fear.

We looked at a switching strategy, which sold out of stocks (S&P 500) and went into cash on a daily basis whenever the Vix was above 30, then shifted back into stocks whenever it dipped back below. This approach would have underperformed a strategy which remained continually invested in stocks by 2.9% a year since 1991 (6.7% a year vs 9.6% a year, ignoring any costs).

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A $100 investment in the continually invested portfolio in January 1990 would have grown to be worth nearly 2.5 times as much as $100 invested in the switching portfolio.

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.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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