The year has started with a correction in equity markets. The S&P 500 is down 10% so far in 2022. Taking a long-term view is very helpful for investors here. Think of a short-term equity market decline as being like turbulence on your next flight. Many commercial air flights can encounter turbulence on the way to their destination. Sometimes this turbulence can be quite severe. But would any investor reading this article, when encountering turbulence on their next flight, use that as a reason to grab a parachute and jump out of the plane?
No! Turbulence on a flight is nothing more than a bump on the path to a longer-term destination. Market corrections are much like turbulence on a long-term trajectory to higher equity markets. They are part of the normal pattern on a journey to the long-term destination of a larger global economy and higher equity prices. Investors must be brave during these inevitable periods of turbulence in markets, and should not jump out of the exit!
What investors should be exiting are investments they should never have been invested in the first place. ‘Hype’ stocks trading on sky-high valuations, cryptocurrencies, SPACs, any asset class activity which was frenzied and where valuation was meaningless is now suffering and these should rightly be avoided.
For those investors with equity investments in high quality businesses trading at reasonable valuations, choosing to do nothing when markets are falling is a hard thing to do. “Keeping one’s head” as Kipling might have put it, is the difficult but correct thing to do. Lower prices actually offer an opportunity, and investors should be doing the opposite of selling, they should be considering buying quality businesses trading at more reasonable prices into market weakness. That’s exactly what we’re doing at Dominion.
Periods of market decline are part of how markets operate. Equity markets and equity fund performance may be negative for periods lasting months. This was the case in 2018 (and 2016, and 2011, 2008, 2001, 1990…). In fact, we have a very long-track record of equity markets declining for short-term periods. Declines happen and investors in equity markets should expect them to keep happening in the future. It would be very strange if they did not happen.
The important thing for investors is what to do during a market decline. The answer is simple, but hard to do in practice: if you own high quality stocks, do nothing! And if you want to take action, buy high quality stocks which will be trading at a discount. The last thing investors should do is blindly exit positions, thus translating temporary losses into permanent losses, in response to the fear generated by short-term volatility.
Responding to weak markets by exiting investments is a form of market timing. You are making a prediction about short-term market performance, and this has been proven, time and again, to be the wrong strategy.
If the global economy can power through the threats it faced in the 20th century, then today’s challenges are nothing more than blips, which will be long forgotten in the future. Investors must be careful not to catastrophise, putting too much emphasis on the problems in the world today (hint: there are always problems in the world) and missing the great opportunity offered by investing in equities and the growth of the global economy over the long-term.
Taking a long-term view of the past helps us to understand how robust the modern global economy truly is. It is a powerhouse of unprecedented wealth creation and equities as an asset class offer the optimal exposure to this growth engine. Knowing, as we now do, that market timing doesn’t work, there is a very strong case that investors should look to maximize their exposure to equities for the long-term and remain fully invested. The question is, which equities? The answer, as it always has been whether in good times or bad, is high quality businesses trading on attractive valuations.
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.
