The last 20 years have provided a number of times when UK stocks have sold off aggressively. They are clearly visible on the graph of the £MCX index as points of short, sharp reversal:
(I’ve chosen the £MCX since this is an index that tends to reflect the UK economy more than the more global £UKX, which is dominated by Oil, Mining, Pharma and Banks.)
While these reversals were undoubtedly times of considerable worry for investors that experienced them, they also provided an opportunity. The 20-year trend of these index returns is still strong upward. Even more so considering that £MCX only represents the capital return. Looking at the total return, by choosing a FTSE250 ETF that reinvests dividends, such as £S250 , the benefit of being in equities over the long term is even more obvious:
An investor who bought during these times of crisis is likely to be still doing well, despite the recent weak equity markets.
Can investors spot the crisis and get out ahead of time?
If these crises can be spotted, then investors can sell out ahead of time and avoid the worst of the losses. The problem is that investors tend to spot too many crises and sell up too often, a problem originating from our history as hunter-gatherers. If one spotted an imaginary tiger in the jungle and ran away, the consequence was a bit of unnecessary spent energy. If one failed to spot a real tiger, the consequence would be much more severe. Those who were bad at spotting and reacting to danger didn’t last long enough to have much impact on the gene pool. Today, we tend to see tigers in the market far more often than they actually appear.
For example, investors who panicked and sold due to the European Sovereign Debt Crisis that lasted from 2019-2014 would have missed out on doubling their money in the £MCX :
Which is the second problem with this strategy. Those who successfully spot the crisis and sell need to know when to re-enter the market. After COVID-19 caused a sharp sell-off at the end of February 2020, the FTSE250 bottomed just a month later, on the 20th…
