Time is the biggest driver of success or failure when investing, yet we rarely think about it

Data Source: Standard & Poors & Ritholtz Wealth Management LLC

How to benefit from this article: The next time you are looking at your investment, and trying to decide or compare whether or not your investment is doing well, ensure that you put it in context and compare 'apples with apples'. Here are the last 90 years of crises providing lessons from history.

Since January there have been big price swings in companies listed on exchanges (equities). It took just 23 trading days for the S&P 500 (biggest 505 USA listed companies) to fall in value by -34% at its low point in late March this year. By the end of May it was up +40%. For June it was up another 1.84%. By the end of July, it could just as easily be down again, who knows and we will add... "who cares!".

Stock exchanges across developed nations including New Zealand experienced similar swings; and all exchanges will continue to experience them.

Is this unusual and should this mean you avoid such investments for a while?

Historically at first glance equities can be even crazier than right now. This latest big swing however is NOT unusual at all when you view matters from a longer time horizon that is beyond the immediate past.

Humans suffer from what's called recency bias - placing far greater emphasis on the immediate past than on events and trends stretching back much longer (that are also usually better matched to the length of time you will hold an investment).

For the last 10 years we have had very rosy times indeed with little volatility. In fact, it had been one of the best periods ever! Now, this is unusual. We got so used to 'unusual' that it became paradoxically, 'usual'. Let's take a look at the last hundred or so years. Depressions, collapses, wars, social upheavals, recessions, oil crises, busts, political crises and on it goes. You name it this last century has experienced it.

The Great Depression's crash began near the end of 1929 lasting well into the 1930's. It is by far the most turbulent market environment ever.

You will be pleased to know that we are in a very different place to the 1930?s in many important ways; financially, politically, structurally and economically

The market was +32% peaking in September 1929. It then fell almost -45% over the next 2 months before rising +28%. Over the entire year it was down just -8.3%. (Time frames alter our perception of the result). The next 4 months saw it rising +22% in 1930, but after another 8 months it dropped -44% ending -25% for the year. Then in 1931, it rose +19% in just 2 months. For those back then trying to time markets, it must have been stomach churning.

The market fell more than -57% from late-December 1930 levels. 1931 would turn out to be the worst year on record for the S&P 500, closing at -44%. It got worse temporarily in 1932 dropping a further -52% in the first 5 months. Can you imagine how an investor would have felt back then? Do you think most would have stayed in? Well for those that did lets see what happened...

Markets then went on to have one of the greatest rises in history. +112% rise in just over 3 months. With hindsight we saw the bottom was in 1932; yet over shorter time periods within that same year the market still fell another -31% before recovering. Stocks finished 1932 down just -8.6% overall. But it wasn't quite over. In 1933 stocks fell another -25% in 2 months.

Reading all this you may conclude its best to stay out and wait until less volatile times return. This would be wrong. Click here to find out why

From there however markets rose a staggering +121% through July before falling -29%. Stocks ended up +50% for 1933; one of the best years ever. In 1934 a gain of +21% and another fall of - 29% ensued.

Markets rise on good news but also on bad news. Its uncertainty and fear that makes the ride bumpy.

For those wanting to withdraw their investments to go spend the proceeds on a product or service managing this volatility in the period right before withdrawal is important. For those contributing regular amounts (such as KiwiSaver) the bumpier the path the better!

All this doesn't mean to not invest in volatile investments - it means using simple strategies with your adviser such as 'Dollar Cost Averaging' to manage the risk. This is the strategy of redeeming/adding set amounts at set time intervals irrespective of what the market is doing or the value of your investment.

Turbulence is normal when views about the future are mainly interpreted as 'uncertain' or 'surprising'.

It entails taking equal fixed-dollar monthly redemption's over 6-12 months irrespective of the prevailing price and not as one lump. Likewise, if you have a large lump-sum to invest you apply the same method going into an investment. The rule is; 'equally spaced time periods and same $ amount in/out each time. Longer term the ups and downs of the short term (< 2 years) makes little difference to the returns you will achieve longer term; yet it substantially reduces 'timing risk'. For retirees a second strategy to lessen the impact of volatility is to hold 1-2 years income in cash-like liquid funds.

What can we learn from this look at markets up until WWII?

Lesson 1: Volatility (fluctuations in the value of an investment) is normal.

Lesson 2: Inside a year the spot price of your equity investment may move considerably up and down many times.

Lesson 3: If you can learn to live with the bumpiness you are almost always likely to make more money over time with no extra skill required, just patience and discipline.

Lesson 4: The big events happen without warning- both up and down. No one can ever predict them well enough over time to make guessing the next one a worthwhile approach. In fact it is a certain path to financial ruin to try.

Milestone advisers allow for these events in setting the right investment strategy. We assume that they will happen and account for their impact in our advice.

Lets now look at crises since WWII?

e 74' oil Crisis. Markets were to fall -37% before bottoming in early-October. Stocks then rallied +21% over the next month. Over the year it ended +26%. Again, time frames come into play. Perspective is important.

The next big crisis was in 1980. Bigger than the advent of big padded shoulders! Markets fell -17% only to experience a +43% bounce thereafter. Stocks were up +32% over the whole year.

1982 recession fears ran high, experiencing -17% followed by a +40% jump. For the year it was up more than +20%.

Black Monday crash of 1987. Stocks had risen in that year up until October by +40%. In a single week in October a fall of -34% hit our TV screens. What most don't know (and the media never tells you) is that for the year the returns were positive. It was up +6%; even after the worst one-day crash in history...

The 1990's asset bubble was a sight to behold. The S&P 500 rose by +20% or more each year for 5 straight years from 1995-1999 (1998 experienced a -19.3% drop before rising almost +34% to end the year at +28%).

The Dot-Com bulge' if it has technology it must be great' of the early 2000s. This mindset and the fear from the Twin Towers 9/11 attack created three wild price swings in 2001. Markets fell -19% before rallying +19% and then a -26% drop. The year ended just -12% down.

The 2009 GFC... Greed is Good, according to Michael Douglas of the film Wall Street. This calamity was far more dangerous to the world, your investments, jobs and the economy than todays crisis as it was a crisis of trust. After dropping -28% markets recovered +67%. The year ended up at +26%.

Which brings us to the present. Western nations are coming to terms with their first big pandemic in over 85 years. An all time high in January followed by some big lows and then historic highs; and it's only been 6 months. More volatility is sure to follow.

Lesson 5: They all play out with no warning. Also, the biggest rises occur when pessimism and fear are at their highs. Trying to time when to be in/out is impossible to do well. Miss the two biggest 'Ups' of a recovery and your wealth only usually grows to around half what it would have in the next 10 years.

Lesson 6: Big moves up and down are not just normal but usually occur all the time (around every 5.5 years - this latest one was 5 years late). Expect more drama to come.

Lesson 7: Most big swings aren't in-sync with what's happening in the real economy. In other words, the economy could be going badly yet markets can be up. It's because the economy is the here and now and the markets are more of what investors think it will be in the future. Today, economists are predicting falls in company earnings in many sectors by over 30% to 40% for the next 2 quarters. However, this changes a 'quality' stock's valuation by around only -6%.

Lesson 8: News & investment commentators make money by focusing on short time-period movements. It sells. They use emotive words, meaningless to smart investors with a proper plan in place. This includes how you invest your KiwiSaver- size really doesn't matter!

Lesson 9: Remember our brains are wired to believe the bad over the good. We also suffer from recency bias which explains why we are feeling this one so much after a 10+ year dream run.

A saying worth remembering; hold your course and ride out the storms in the financial boat your adviser has prepared for you.

Most of all in times like today remember a basic tenet of capitalism: There are always more ups than downs and the magnitude of those ups are bigger than the magnitude of the downs.