Eying stability and progress in periods of crisis: History confirms that long-term investment views point to brighter times.
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Eying stability and progress in periods of crisis: History confirms that long-term investment views point to brighter times.

Periods of financial shocks have come and gone in history. A century's worth of economic data shows that globally diversified long-term investment strategies consistently triumph above all others, even reaching new highs after the crises subside.

The spreading of the corona virus on an international scale has required drastic measures designed to contain it. These in turn have triggered a profound change in economic and social activities alongside extreme uncertainty and volatility in the financial markets.

The resulting sharp fall in global sentiments is being felt across industries. The disruption of supply chains and the simultaneous decline in the consumption of goods and services have intensified it. Investors now face the question of how to proceed considering the current challenges.

Historical data gives guidance for future outlooks

Whist the causes, duration and intensities of financial crises differ, they are a recurring theme in history. The Global Investment Returns Yearbook 2020, a yearly research report produced by the Credit Suisse Research Institute, compiles and analyzes the financial market history of twenty-six markets from 1900 to the start of 2020.

The economic data of one hundred and twenty years shows how some of the most impactful economic crises in the world started, developed, and subsided. The most significant occurrences were triggered by the:

  • Post-World War I recession going into the early 1920s
  • Wall Street crash of 1929, including the Great Depression which lasted until early 1940s
  • OPEC oil shock of the 1970s
  • Technology bubble in 2000
  • Financial crisis of 2009
Patience pays out in periods of crisis

Besides revealing impressive long-run equity returns, the graph helps to set the financial shocks of the past in perspective. Events that were traumatic at the time now just appear as setbacks within a longer-term secular rise.

Investment composure and patience pay out in the long-run

Investment strategies with a worldwide inclusion and a long-term outlook have consistently triumphed over all others. The historical data shows how troubling economic events resulted in recovery and even expansion once the crises waned.

For example:

  • At the depths of the Wall Street Crash, US equities had fallen by 80% in real terms. In a long-term context equities eventually recovered and gained new highs.
  • In the first half of the 20th century, several countries experienced extremely low returns arising from the ravages of war and extreme inflation. Once the economic downfall reversed, those countries experiencing the lowest returns during the crisis were among the best performers thereafter.
In the long-run equities have gained new hights

The past shows that:

  • Periods of uncertainty take time to develop and reach the climax before policy measures to mitigate the negative impacts are effective (in this case virus containment and economic policies).
  • Financial markets move fast and are usually affected significantly by daily news flows, positively and negatively.

Financial shocks are dramatic episodes registering severely at the time of occurrence, and this crisis is unprecedented. Riding out such periods of market stress is painful, but it is in extraordinary times like these that well-established investment processes and strategies reveal their worth.