Summer has mostly slipped away, but I hope like me, you found time to enjoy it with friends and family. Mine included a trip in late June to Gelsenkirchen, where my son and I witnessed Jude Bellingham’s dramatic 95th-minute overhead goal keeping England in the Euros.
Then in early August, my family enjoyed a week in Spain which was far more relaxing than watching England’s performance! However, as I lounged by the pool, it became clear that the drama had shifted from the football pitch to the global stock markets.
On the 5th of August The Financial Times reported a historic drop in Japanese equities, sparking fears of contagion. The S&P 500 mirrored the global rout, closing down 3%, with 95% of its constituents falling. Concerns about a weakening U.S. economy and the Fed’s inaction on rate cuts triggered the selloff, a contrast to the two-year rally that had propelled equities to record highs.
A flood of “don’t panic” posts from economists and market commentators filled my LinkedIn feed. Did retail investors heed this advice? Data from Marketwatch and Vanda Research suggested so, both highlighting that no significant panic selling occurred.
Perhaps they too were reading the same social media pleas for calm as I was, or maybe a growing acceptance of market volatility had tempered their reactions. Additionally, an understanding that a longer-term investment view was need in equities may have helped.
See also: Quilter tops lang cat’s advised platform sales chart as industry outflows rise
Indeed, the August sell-off proved very short-lived, with most markets recovering beyond pre-sell-off levels within weeks. However, not all recoveries are quite so swift, but recoveries may happen sooner than most think.
MFS (mfs.com) has created an excellent document outlining the ‘ten’ biggest S&P 500 drops (pre-2023) and their recovery times. The data reveals an average 36% maximum drawdown and a 15-month recovery period (it includes the Great Depression’s 86% drop, showing it took 33 months to recover). This average might surprise some, offering comfort for retail investors considering an investment period beyond 15 months.
Of course, not all retail investors are willing to tolerate a 36% loss or feel confident in the historical recovery periods. As such, tolerance for loss has gained greater emphasis because of regulatory change (in areas of suitability, capacity of loss etc), leading to the significant risk-aligned investment solutions market today.
Such solutions help provide greater peace of mind during significant market events as witnessed on the 5th of August, therefore reducing ‘panic’ selling. Regulation has undeniably helped create better investment solutions for retail investors.
See also: Rob Thorpe: Data is important but relationships matter
However, managing portfolio volatility is just one piece of the puzzle. Retail investors face a broader spectrum of risks in their financial planning, especially in the context of retirement and drawdown strategies. Inflation risk and sequencing of return risk, where market downturns during withdrawal periods can be devastating, are critical considerations.
There is also the dual challenge of balancing the risk of depleting funds too early against the risk of leaving behind excess capital that could have enhanced one’s quality of life. Educating retail investors about these nuanced risks is essential, as it broadens their understanding beyond simply managing portfolio volatility. Apps and decision trees have their limitations!
This underscores the critical role of quality financial advice that extends further into lifestyle planning and coaching. Many financial planners are now embracing this expanded role and seeking to educate on its importance.
See also: FCA lays out plans for traffic light ratings of DC pensions
Dan Haylett of TFP Financial Planning exemplifies this with his “Humans vs Retirement” podcast, which explores the psychological impact of retirement and post-retirement lifestyle planning and living. Financial education today should aim to teach retail investors that financial planning is important, but just one element that should be considered in a broader lifestyle plan.
With the right products and a comprehensive financial and lifestyle plan, perhaps the commentators are right – “now is not the time to panic.” In fact, it begs the question, “when would retail investors ever need to panic?” For me, my moment of ‘panic’ was the 94th minute at the Veltins Arena in Gelsenkirchen.
Rob Thorpe is founder of Distribution Alpha, a specialist distribution consultancy.
