31 October 2014

Forget the horrors of Halloween; the spectre that haunts investors is a stock market crash. Even the layman will know the names of some of the more dramatic: Black Monday in October 1987, the aftermath of the 2000 technology bubble (the DotCom crash) and the start of the current financial crisis in 2008 have taken their place among legendary events like the South Sea Bubble in the 1720s and the 1929 Wall Street Crash.

A nightmare on Wall Street

The numbers behind these crashes do sound horrific. On 19 October 1987, the Dow Jones Industrial Avenue fell 22.6% in just one day, wiping $500 billion from the value of the stock market. The decline in technology shares at the turn of the century took a bit longer but was even more frightening: between January 2000 and August 2002, the NASDAQ index of hi-tech shares lost three-quarters of its value. The UK stock market has also had its share of scary days: on Black Monday in 1987, the FTSE 100 index dropped 10.8% in one day,  as part of a 34.7% fall over the course of three months. The bursting of the technology bubble saw the index decline by almost 45% between December 1999 and January 2003. Even that was dwarfed by the prolonged slump in the aftermath of the 1970s oil shock, when the stock market lost almost three-quarters of its value in two-and-a-half years of vicious declines.

With the benefit of hindsight, these horror stories were all too predictable; the worst stock market crashes are generally preceded by the greatest excesses. In the year before Black Monday, the Dow had all-but doubled; the NASDAQ did the same in the year running up to the pricking of the technology bubble. The FTSE 100 index jumped more than 44% in the 12 months running up to both the technology crash and Black Monday.

Over-exuberance is often also associated with assertions of a new paradigm, or similar grandiose claims, in financial markets. In 1999, New Economy evangelists predicted that dot.com start-ups would eclipse old-economy dinosaurs like Marks & Spencer or Unilever.  In the run-up to the financial crisis, economists opined about the Goldilocks economy - neither too hot nor too cold - and proclaimed that securitisation and other fancy financial derivatives had all but eradicated market risk. In the cold light of reality, all these predictions have proved as worthless as the companies which were supposed to be profiting from them - companies like Lehman Brothers and Northern Rock, victims of the 2007 financial crisis; or boo.com and pets.com, technology companies which briefly flourished before going bust.

The dead rise again

Fortunately for investors, however, what goes down generally comes up again, although they do have to be patient. The 1987 crash soon appeared little more than a blip on a long upward trajectory for both the FTSE100 and the Dow; stock markets in the US powered past historic highs almost two years ago, our own FTSE 100 has made various attempts to climb past its previous closing high of 6930.2, reached on 30 December 1999, but has so far failed to breach it. Add in dividends, however, and all the research shows that equities beat cash and bonds over three-quarters of any five-year period in the last 115 years.

The mistake that private - and many professional - investors make is to attempt to second-guess when the highs and lows will be achieved. In fact, rather than achieving the holy grail of perfect market timing - selling at the top and buying at the bottom - they can often  do the opposite. A look at both the FTSE 100 flows and retail investments into funds over any 10 years, show investors piling in with enthusiasm at its height and selling out when sentiment is at a  low ebb.

But according to Rob Burgeman, Director of Investment Management at Brewin Dolphin,  "Investing needn't be scary, although it is often driven by fear. While there will always be chilling market declines and sometimes scary volatility, you can keep demons at bay by investing for the long term. That's the view we always take at Brewin Dolphin - but it doesn't make us frightened of adapting when the right opportunities come our way."


-ENDS-

The value of your investment may fall and you may get back less than you invested.

Past performance is not a guide to future to performance.

All performance is quoted before fees, charges and transactional taxes and these will have the effect of reducing the illustrated performance.

Any future performance data is based on reasonable assumptions based on objective data but there is obviously no guarantee that these levels of performance will be obtained in which case returns will differ from those illustrated.

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