The share market has been extraordinary lately. On Monday of this week, the market fell by an average of 7.33%. This meant that the average Australian share had dropped by almost 20% in just 12 trading days since February 20.

Obviously, it would have been wonderful if we had all withdrawn our money from the market on February 19. But no one knew that then. And since then, with the market being so far down, the risk of withdrawing money is even higher: doing so could simply lock in the losses that, at the moment, for many people only exist on paper.

The markets moves of late remind us of article that was published just over four years ago now. It was written by a chap named Peter Gee, who is a research manager with Morningstar Australasia. Originally, the article was published on on 10 December 2015. That site has since changed its name to and is owned by Morningstar. You can read the article for yourself by clicking on Firstlink’s logo here:

The article talks to the merits of taking a long-term view – something we all need to be reminded of in the current market. We wrote about the article once before, back in 2018. This week, we thought that the best thing we can offer you is a reminder of what we wrote back then – with some additional comments about the current situation facing the market.

To make sense of the current situation, the first thing we need to realise is that no one knows what the market will do tomorrow, next week, next month or even next year. That’s why there were no big withdrawals on February 19. Here is how John Jennings, writing in Forbes Magazine as recently as last December, summed up the research:

Similarly, a recent study of 6,627 forecasts made by 68 experts found that the forecasters performed in line with what chance would dictate and overall their forecasts were not quite as good as a coin flip. As expected, a handful of forecasters were pretty good, and a handful were terrible. Everyone else was in-between.

We have added the italics to the above quote. But note what the author is saying: people would been slightly better off tossing a coin than relying on the experts who had been studied by these researchers.

In many ways, it is little surprise that experts are not very good at predicting short term movements in the markets. After all, as Peter Gee and Morningstar showed us in 2015 using a balanced super portfolio as his example, short term market performance looks like this:

The green bars are the ‘good’ months in which the market rises and returns are positive. The red bars are the ‘bad’ months when the market falls and the returns are negative. Short term investing in markets like the share market is a random mix of green and red. Some months the market goes up (about two in three, as it happens), but in other months it goes down. Sometimes the changes are large, sometimes they are small. But they are almost random – which makes predicting these short-term changes really difficult. As an investor, there is little that can be done about this short term volatility. It’s just the way it is.

But things are not so hard to control for investors who throw their eye out over the medium to long-term. When we look at the experience of these longer periods, things change. Patterns even start to emerge. The market is not as noisy. Not as chaotic. The underlying economic relationships manifest, and performance starts to get much less lumpy. Once again, Peter Gee and Morningstar show us this when they change their time period from one month (in the graph above) to one year:

Now, there is more green than red. Even more importantly, the colours tend to lump together, dividing into extended periods of positive and negative performance. We will come back to what this means a little later. But, for now, we see that the market is much less volatile when we take a 12 month timeframe.

So, how do you think things look when we use a rolling ten-year average? Now, relationships and trends become clear. Growth assets, such as property and shares, will, on average and in the long run, earn more than the risk-free rate of return. Risk takers must be compensated, or else they will not take risks. It’s basic economics. Using one more graph from Peter and Morningstar, the ten-year rolling average looks like this:

Now, the graph looks like a well-manicured front lawn. The chaos and instability has gone. Things become much clearer. Despite all the negative one-month results, over the twenty-year period, there are no negative ten-year periods. (And remember, over a twenty-year period, there are actually around 120 separate ten-year periods).

As we saw above, there were plenty of negative single years, and even more negative single months, but as time goes by their effect is increasingly outweighed by the positive periods. There is safety in time. Time is the investor’s friend.

Gee’s article shows that investors who use a minimum holding period of at least ten years reduce almost all the risk of losing money. Put another way, people should be very careful about investing in the share market with a timeframe of less than ten years. If you need money sooner than that, the share market is not the place to hold it.

But this month is a red month!

One thing that is very clear is that February/March 2020 will show as a ‘red one’ if Morningstar re-do exhibit 1 from above! And, as exhibit 2 shows, red months tend to cluster a bit.

But have another look at exhibit 2. It suggests that, in the 20 years between 1995 and 2015, there were three groups of negative returns, lasting for up to 18 months (1999, 2002 and 2008). Remember, these are ‘rolling’ one-year periods, so these periods generally are the ones that include a few really poor months in a row. Given the ASX’s falls since February 20, we can be fairly certain that we are in another of those red periods right now.

Now ask yourself a question: when you buy something, would you rather make your purchase in the month before prices fell or the month after? To put that another way, do you want to buy things when prices are high or when prices are low?

Share prices are currently a lot lower than they were a month ago. So, if you were prepared to invest a month ago, it makes even more sense to be a buyer today. But, should you wait longer and see if prices fall again next month?

Well, that is where you need to remember the coin tossing experience. No one knows if prices will rise or fall next month. You might be better off waiting – or you might not. This is why many successful investors choose to invest small amounts frequently, rather than a large amount all at once. In fact, if you invest the same amount of money each month (say), then you will automatically buy more shares in months when prices are lower. This ‘skews’ the average purchase price of your portfolio down and helps ensure that longer-term performance is unlikely to be negative.

These investors would even be looking at the large drops in the market recently as opportunities. And, if you don’t need to sell your shares any time soon, you should too.