Thinkpiece

24 Mar Thinkpiece

In this update: 

• The Paradox of Investing: Bad Months and Good Years

Compounding is hard because a bad month can feel longer than a good decade.

Morgan Housel

This simple observation captures one of the most challenging psychological aspects of investing – our skewed perception of time during market volatility.

When markets decline, minutes stretch into hours. Each portfolio update can bring fresh anxiety, unless one is experienced enough to know that this is only temporary. Then once is naturally dispassionate and disinterested! It doesn’t even register on our radar.

A 10% correction over a few weeks can create more emotional distress than years of steady growth. This psychological asymmetry makes maintaining a long-term perspective difficult for some.

Yet historical data consistently shows that market declines are temporary interruptions in a long-term upward trajectory. Since 1928, the S&P 500 has experienced 26 bear markets (declines of 20% or more), yet has delivered average annual returns around 10%. Despite these regular downturns, $10,000 invested in 1970 would have grown to over $1.8 million by 2024, even after accounting for inflation.

Market corrections, which are typically defined as declines of 10% or more from recent highs, are remarkably common yet they can be unnerving for some investors.

On average, the stock market experiences a correction approximately once per year, with most lasting between two and four months before recovery begins.

Since 1980, the S&P 500 has endured 25 corrections, yet still managed to produce positive annual returns in 32 of those 45 years. This predictable rhythm of temporary setbacks followed by recoveries reinforces that these declines, while they can be emotionally difficult, are normal features of healthy markets rather than signals to abandon long-term investment strategies.

This paradox of perceived time creates a fundamental challenge. The mathematics of compounding requires patience and persistence, but our emotional experience of market volatility can push us toward short-term thinking and reactionary decisions.

The solution lies in understanding this disconnect between mathematical reality and emotional experience. Diversification across asset classes serves as both financial and psychological insurance, dampening volatility while maintaining growth potential. A properly diversified portfolio doesn’t just optimise returns – it makes the journey psychologically manageable.

The most successful investors aren’t necessarily those with superior analytical skills, but those who can maintain perspective through market cycles. They recognize that the pain of market declines is temporary, while the power of compounding is permanent – as long as you give it time to work.

Your opportunity

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on 01626 305318 or via email here.

The value of investments can go down as well as up. You may end up with less back than you have paid in. Past performance is no guarantee of future returns.

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.