For those unable to escape the 24/7 news real, October has delivered yet again for our headline seeking media. Words such as crash, correction, sell off, fear, panic and phrases like “billions wiped” and “worse day since” (I guess the worse day since the last worst day) with accompanying visual footage (some of which is horribly outdated) are front and centre once more.
And yet this is nothing new. In fact, it’s quite common. Shares, over the long term, generally have a down year in every three. The catch is, no one knows when or if we will get a few in a row. To put October into some perspective, yes, share markets are lower than they were last month and lower than they have been all calendar year. Reductions like these, whilst never ideal, are generally healthy for future returns as they clear out participants trading on momentum with little regard for market fundamentals and valuations, of which is clearly the focus in building any long-term portfolio. All the while, underlying companies continue to generate earnings, produce profits and for many, pay dividends.
Unfortunately, words such as income, time, discipline, consistency, diversification don’t sell papers or generate anywhere near the required click count.
What’s undeniable, is over the long term, shares go up more times than they fall and, over the long term, by increasing prices, reducing costs and creating new products or services, profitable companies usually manage to increase their earnings faster than inflation. This will keep happening time and time again for as long as companies continue to reward investors with their share of the profits of its underlying productive enterprise.
The chart below is from index fund manager Vanguard. It’s one of our favorite posters and is updated each financial year and really puts events and many a “crisis” into context.
Remember the tech wreck? The GFC? Brexit? An October day in 1987? It’s all in there and importantly the market has risen above each time it’s pulled back.
So long as you are invested within your risk capacity and tolerance levels and are not forced to draw down large of amounts of capital each year from your growth assets, it makes periods like these, and the ever constant up and down nature of shares, all the more worth it.