<p>When it comes to running my portfolio, I spend a fair amount of time thinking ahead. I like to plan what new money I&#8217;m likely to add over the next year, whether to shift my position sizes a bit, and sell a holding or two to use up my annual CGT allowance. <!--more--></p>
<p>I also like to try and prepare myself mentally for the next major market slump. And for this, I generally look back at what&#8217;s happened before to get a sense of what sort of falls are likely and for how long.</p>
<p>Doing this has helped me through the two market meltdowns of the last twenty years.</p>
<p>They still hurt like hell of course, but they stopped me making the big mistake of selling out because you&#8217;re frightened of where the market might go next.</p>
<h2>Two decades of not a lot</h2>
<p>History doesn&#8217;t tell us precisely what will happen next. Far from it. But it does provide a useful guide as to what to reasonably expect.</p>
<p>Being an investing nerd, I&#8217;ve been looking at studies of long-term market returns since the late 1990s. Ironically, over that timeframe, UK equity returns have been pretty unspectacular.</p>
<p>The FTSE 100 hit its infamous peak of 6,930 in December 1999. It didn&#8217;t rise above that level until February 2015.</p>
<p>Right now, the index only stands at around 7,300, just 5% higher.</p>
<p>Add in reinvested dividends and we have a 143% gain since the end of 1999. That sounds pretty decent, but it&#8217;s only equivalent to 4.6% a year.</p>
<p>The 2000s and 2010s have been a tough time to be a UK equity investor.</p>
<h2>Taking a world view</h2>
<p>Most investors have become increasingly global in their outlook. So we need to expand our investing history, too.</p>
<p>Credit Suisse&#8217;s latest yearbook puts world equity market returns at 5% a year. That&#8217;s net of inflation since 1900.</p>
<p>Bonds have returned just under 2% and cash just under 1%.</p>
<p>These figures are based on 23 markets which account for some 90% of current world stock market valuations. It includes total wipeouts in Russia and China for several decades and near zeroes from Germany and Japan.</p>
<p>The global stock market has been a resilient beast, to put it mildly.</p>
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<p>It&#8217;s not been a smooth ride for shares, though. Bonds have done better the last twenty years or so, as interest rates have tumbled. However, the two decades before that, <a href="https://ritholtz.com/2019/08/death-of-equities-40th-anniversary/">the 1980s and 1990s</a>, were a great time to be invested in shares.</p>
<p>The UK has performed similarily to world markets in the long term (since 1900) and the medium term (since 2000).</p>
<p>European countries have largely been the laggards, while Scandanavian countries, North America, and Australia/NZ have done better than average.</p>
<h2>The average that rarely happens</h2>
<p>We know a market slump is coming at some point. However, we don&#8217;t know when, how deep it will be, or how long it will last for.</p>
<p>When I first started looking at long-term returns, I focused on the average annual percentages and used them to do some rough calculations of how my money might grow.</p>
<p>But discussion around this topic has become much more nuanced in recent years.</p>
<p>Yes, the average might be 7-8% a year (if we assume 5% plus inflation of 2-3%) but many individual years boast returns of 20%+ or losses greater than 5%.</p>
<p>Indeed, it&#8217;s a rare year that ends up producing returns in the range of plus 5-10%.</p>
<p>Here are the annual returns for the UK market, including dividends, since the mid-1980s:</p>
<p><a href="https://www.itinvestor.co.uk/wp-content/uploads/2019/09/UK_market_returns_from_1986_to_2018.png"><img class="alignnone size-large wp-image-2887" src="https://www.itinvestor.co.uk/wp-content/uploads/2019/09/UK_market_returns_from_1986_to_2018-600x303.png" alt="UK market returns from 1986 to 2018" width="600" height="303" /></a></p>
<p>Out of the last 33 years, only two of them produced &#8216;average&#8217; returns between 5 and 10%.</p>
<p>Even more bizarrely, those two years were 1987 (8.4%) and 2007 (5.3%) &#8212; hardly the two times you would have expected to be the most average.</p>
<h2>Calendar years can deceive, too</h2>
<p>Looking at the totals for individual years conceals some wild swings.</p>
<p>The market crash of 1987? Not obvious from the chart above.</p>
<p>The Asian and Russian crises of 1997/8 which put paid to Long-Term Capital Management? Nope. The UK market declined 24% between July and October 1998 but again it&#8217;s not obvious from this chart.</p>
<p>There were falls of nearly 20% in 2010/11 and 2015/16, too. Both are MIA, although these annual figures show 2011 as producing a small drop.</p>
<h2>A quote to invest by</h2>
<p>I&#8217;ve used this quote from Morgan Housel before. It&#8217;s such a great frame of reference, it&#8217;s well worth wheeling out again:</p>
<blockquote><p><em>Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime. Those who don’t understand this will eventually learn it the hard way.</em></p></blockquote>
<p>The two takeaways for me: big falls are part of the way the market works and they occur more regularly than you might expect.</p>
<p>Since I&#8217;ve been an active investor, the largest peak-to-trough UK market falls I&#8217;ve experienced have been 24% (1998), 48% (2000-03), and 46% (2008-09). I&#8217;ve seen three other drops of 15% or more.</p>
<p>I&#8217;m kind of hoping those last two could turn out to be my &#8216;50% or more&#8217; lifetime falls, but I&#8217;m certainly not going to count on it.</p>
<p>There&#8217;s no law saying markets have to behave as they have done in the past.</p>
<p>In terms of duration, the falls of less than 25% I&#8217;ve witnessed lasted about a year at most before the market regained its previous peak.</p>
<p>The two major ones lasted a little over five and three years respectively.</p>
<h2>Prepping for the next one</h2>
<p>It&#8217;s now a decade since the last major market slump. I&#8217;ve no idea if another one is just around the corner or another decade or more away.</p>
<p>But I&#8217;d much rather decide what I&#8217;m going to do in advance. I don&#8217;t want to be forced into action when the headlines are all screaming &#8220;meltdown!&#8221;</p>
<p>My basic strategy with the last two major falls has been pig-headed obstinance: I didn&#8217;t sell out of any positions and move into cash to wait it out. That&#8217;s because I don&#8217;t believe market timing is a sensible strategy.</p>
<p>At times, I have let my cash balance build up a little, but more because of a lack of conviction about what to buy rather than general market concerns.</p>
<p>Seeking safety in cash often seems like a smart move. But much more often than not, markets tend to rebound and being out of the market is a costly mistake. So I play the odds, accepting that occasionally this will mean getting stung.</p>
<p>I reckon I&#8217;ll approach the next slump, whenever it happens, in much the same fashion.</p>
<p><a href="https://www.itinvestor.co.uk/portfolio/">My portfolio</a> looks somewhat different, though. It&#8217;s much more global and I <em>think</em> it&#8217;s a little less risky overall due to the infrastructure trusts I have been investing in. While I have a fair amount of small-cap exposure, it&#8217;s less than I had going into 2000 and 2008.</p>
<h2>Everything changes</h2>
<p>However, things have changed a lot for me on a personal basis since the first two major drops.</p>
<p>When the first one came along, I was single and didn&#8217;t have that much invested. The new contributions I was able to make every year to my portfolio made a significant difference.</p>
<p>The first drop was also a little different in that it was a lot more drawn out than the global financial crisis. It was more death by a thousand cuts than the swift beheading of 2008-09.</p>
<p>Strangely, as I look back on it now, I actually don&#8217;t remember as being that bad from an investment point of view.</p>
<p>It was largely confined to technology and media shares, while more traditional businesses actually did quite well, as they were on such low valuations.</p>
<p>I had some tech exposure &#8212; heck, I even bought some Lastminute.com &#8212; but nothing too aggressive.</p>
<h2>Panic on the screens of London</h2>
<p>The global financial crisis was a much sterner test for my investing cojones. It was absolutely brutal at times, with more and more terrible news piled on day after day.</p>
<p>I remember thinking it could actually be the end of the financial system as we know it. Subsequently, reading accounts of those involved in the bailouts, I realised how close we came.</p>
<p>The first phase of the financial crisis lasted for a year and a bit, taking out the likes of Bear Stearns and Northern Rock. But it was the six months starting in September 2008 where most of the carnage happened.</p>
<p>My portfolio took one hell of a beating. I was living with my soon-to-be wife and we were both earning decent salaries. I was able to invest a reasonable amount of new money and by the end of 2009, my investments were worth more than they were at the end of 2007.</p>
<h2>Why #3 could be tougher for me</h2>
<p>I&#8217;ve continued to invest regularly and my portfolio is worth many times more than it was prior to the last market meltdown.</p>
<p>That&#8217;s not because of any great genius on my part. It&#8217;s mostly down to saving hard and riding the markets higher.</p>
<p>But it also changes things. Sure, the last fall hurt in percentage terms. But the pound damage the next one inflicts could be an order of magnitude greater.</p>
<p>I&#8217;m not sure how that might feel.</p>
<p>I&#8217;ve got a lot less time to recover financially, being that much closer to official retirement age. And as I&#8217;m now working part-time, I&#8217;m not adding as much in the way of new money to my portfolio.</p>
<p>Plus, I&#8217;ve got two young kids. That changes your perspective on all manner of things.</p>
<p>All things considered, while I think I can draw confidence from the (pig-headed) way I faced my first two market slumps, I need to be prepared for the fact the next one is likely to feel very different.</p>
<p>In other words, I shouldn&#8217;t get too cocky just because I survived similar episodes before!</p>
 
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<p>Please note that I may own some of the investments mentioned above -- you can see my current holdings on <a href="https://www.itinvestor.co.uk/portfolio/">my portfolio page</a>. </p>
<p>Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!</p>
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I think I could face a third financial crisis, in fact a rerun of anything since 1985, and in my records only in 2001, 2002, and 2008 have losses exceeded 10% on a calendar year basis. I would stay invested through such a crisis.
I'm less sure about things if it is a rerun of the 1930's depression or the 1970's stagflation.
I’m less sure about things if it is a rerun of the 1930’s depression or the 1970’s stagflation.
Yes, not having lived through those periods, as an investor anyway, I think it's much harder to envisage how they might feel. I think the latter is the more likely of the two to recur (the world was such a different place in the 1930s), but who knows what might happen.