The Price of Panic Versus The Rewards of Resilience

Don’t panic until it’s time: then think twice.

At SCM Direct, our focus is always on preserving and growing our clients’ wealth throughout ever-changing political, economic and market cycles. Today’s markets present both painful volatility and exceptional opportunities for resilient investors with a longer-term perspective.

The Investment Team examined the three largest market shocks over the past twenty years, where the main UK equity index fell by almost a third, on average, to illustrate a profitable strategy in times of economic stress and uncertainty.

Our analysis demonstrates the cost of being shaken out by heavy losses and highlights the benefits of holding on through market storms.

The Price of Panic

Investors in the UK stock market over the past two decades have endured eight down years when the FTSE All-Share closed lower. However, three years were particularly severe: 2002, when the markets continued their slide following 9/11, the Global Financial Crisis or Credit Crunch of 2008, and the Covid-19 shock of 2020.

Selling out of the market generally occurs at the time of peak distress when sharp declines lead to widespread capitulation. However, the data shows this reaction leads to investors missing an average gain of 45% over the two years from the market trough.

The Rewards of Resilience

On the other hand, cultivating resilience to falling markets has yielded handsome rewards. The average profit from the depths of the worst three events to the present day is 92%, indicating that the point of maximum pain can be an opportunity for substantial gain.

Recent decades of stock market performance suggest the following advice: ‘Don’t panic until it’s time: then think twice.’ We believe that a successful investment strategy relies on contrarian thinking and clarity of investment strategy over the longer term. This entails diligent research to discern consistent historic patterns and trends, robust insight to understand the underlying market drivers and expert foresight to navigate the winding road ahead.

Looking much further back illustrates that volatility, corrections, and crashes have been integral to capital market dynamics for centuries. Around four hundred years ago, the Kipper und Wipper financial crisis emerged when City-states within the Holy Roman Empire began to mint deliberately debased currency to finance participation in the Thirty Years War. Bona fide silver coins were melted and mixed with base metals, using scales referred to as Kipper und Wipper, fuelling high inflation in the process.

In the following decade, the Tulip mania of 1633-37 reached a crescendo of speculative over-valuation. At peak mania, single tulip bulbs were sold in the Netherlands for the equivalent of 10 times the annual income of a skilled craftsman.

Taken together, one can see that inflation and asset price bubbles have a long and ignoble pedigree.

At SCM, we use modern Exchange Traded Funds (ETFs) to achieve low-cost, high diversification across the breadth of asset classes, continents, and countries. This approach can help to shield investors from wild whirlwinds in markets, while offering investors significant participation in the recovery of markets after downturns.

Capital at Risk.

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the past performance is not a guide to future returns.  SCM Private does not give personal advice based on your circumstances. We aim to provide investors with understandable information so they can make fully informed decisions.  If you are unsure about the suitability of our investment portfolios please contact an independent financial adviser.

SCM Direct is a trading name of SCM Private LLP which is authorised and regulated by the Financial Conduct Authority to conduct investment business No. 497525.

SCM Private LLP is a limited liability partnership registered in England and Wales  No. OC342778.

Share