Caravel Partners

Benedict Carter
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What can the average person do to not only safeguard their wealth, but also thrive through it and into better times when markets are depressed or even declining?

Perspective

While the natural instinct is to focus on the market being down by more than 20% from the recent peak, looking at history will certainly help you keep it all in perspective. Over the last five years, $100 in the S&P 500 grew to $187, an annualized return of over 13%! This return far outpaced bonds and cash. And on the more critical point of increasing purchasing power, stocks rose significantly faster than inflation.

Long-term, stocks have outperformed real estate, bonds, and cash despite wars, a depression, financial crises, and numerous recessions. According to data from Jeremy Siegel, stocks have outperformed bonds and stocks more than 80% of the time in 10-year periods since 1871. While stocks clearly under perform in some periods, they outperformed in 100% in 30-year periods. Historically, equity investment is unrivalled in growing after-inflation wealth over the long term.

Buying stocks after a 20% decline has typically led to better returns over the following one and three-year periods. The median bear market lasts about 12 months. They have varied in length - stocks fell by -86% from 1929 to 1932, which coincided with the Great Depression – but equities have always recovered eventually, as evidenced by their impressive long-term performance.

Deal with the Present

If possible, keep enough cash on hand to cover living expenses over a reasonable period. Since even the worst bear markets have rarely lasted more than three years, that seems like a suitable place to start, but personal circumstances differ. The key is to position yourself so you are not forced to sell your equity holdings, turning a paper loss into a real one.

In addition, ensure new investments made during this period are made in an asset mix designed to protect wealth. That means fixed interest instruments, strong stocks which will continue to pay dividends, niche equity assets which will perform strongly precisely because of current events, perhaps gold or other precious metals. Challenging markets are never pleasant, but they are at the heart of why stocks have been the best-performing asset class over time. An investor can profit from the dynamism of the global economy by investing in equities. Still, it comes at the price of dealing with the volatility of the market caused by the reactions and overreactions of market participants.

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