Jan-Carl Plagge – Vanguard
RP: Nobody likes to the see the value of their portfolio fall, but bear markets are inevitable. In fact, it’s those bear markets that are the very reason why we can expect an investment return in the first place.
Jan-Carl Plagge is Head of Portfolio Research for the fund management firm Vanguard, based in London.
J-CP: If investors invest in equity markets, for example, as a risky asset class; they’ve exposed their investment to risk as they are aiming for a premium at the end of the investing period. The ups and downs are a manifestation of the riskiness of volatility; I would even say that – without fluctuations, without ups and downs – the returns in the equity markets wouldn’t be as high as they are.
The higher the risk, the higher the fluctuation – if systematic, the higher the returns are on average that investors can expect at the end of an investment period.
RP: No-one can predict bear markets with any consistency. But research by Vanguard shows the importance of putting them in perspective.
J-CP: There is no way of telling, in advance, how long a bull market will last. What we can say, however, is on average that bull markets tend to last longer than bear markets. In fact, if we look at the last 100-120 years of US equity market history, we see that in more than 80% of the time, we’ve been in bull market territory. In less than 20% of the time, we’ve been in bear market territory.
RP: Because they’re only human, investors tend to act on their emotions. But the evidence clearly demonstrates that it’s those who are able to keep their emotions in check who earn the highest returns.
J-CP: If we look at the last 20 years, for example, and look at global developed market equity returns – to name an example – investors would have been able to generate roughly 9% on a before-cost, before-tax basis in pounds. Had they invested in the US equity market, they would have done even better, they would have been able to generate 10% on a per annum basis. Had they invested in UK equity, which didn’t work too well on a relative basis, they would have still earned about 5.5% on a per annum basis. But as the same time, over the same 20 years we observed, we’ve seen that investors could have lost more than 40% of their investment if they had bought and sold at the worst possible moments.
RP: Of course, the past does not predict the future. But we can draw valuable lessons from it. And it’s important to remind ourselves of those lessons when markets fall.