With the background of the markets where uncertainty is starting to increase, there are many questions at the back of people’s mind. One of the biggest question is “How low can it go”?

Just about close to the end of last year, I had a friend who believed so much in the Faang (Facebook, Apple, Amazon, Netflix, Google) stocks and had been stocking up a huge concentration into those few companies, because of the historical large returns in the recent times. And many investors continued to expect that to continue for those few companies, which based on evidence over decades shows not be true. Reality struck when the similar stocks are down roughly about 37% from the beginning of this year.

If you are investing into a single company like Zoom or Netflix or even worse, into cryptocurrency like Luna, it would have fallen by about 70%-99% and in some instances, it would have wiped out the entire value. This could be an instance of catching a falling knife where the company you keep buying into eventually disappears, as it can and will happen from time to time. Some companies can suddenly go into a situation when competition is stiff or the industry becomes obsolete and changes can happen fast.

Smart learning lessons

On the other hand, if you had invested into evidence-based strategies widely diversified on a global scale across profitable companies, total of 14,000 all across the world, you would still experience the fall (due to emotions of the investors), but the fallout would be much less significant due to diversification. In fact, the drop is only about one fifth of the drop as compared to the Faang stocks, which means it is still holding up very well, due to the right strategies in place.

If you were to be smart about it, based on historical investments over the past multi decades of history, with some allocations to bonds to it, the worst case scenario of the lowest would have been about 30-40% drop, depending on your allocation to bonds.

When diversified, the drop is temporary

The drops are in fact temporary on a globally diversified portfolio scale as there will still be companies that did not make it eventually, but there will always be new companies to add to the pool that are more profitable and reasonably valued. And with 14,000 companies on hand, there is no fear of companies going from profitable to bankrupt, except maybe on a small number of them. Depending on the personal objective of the goal and the kind of drop you can accept, we can fit the right allocation for you so that you can sleep well at night and expect the temporary drops.

When the recovery comes

After the period of temporary drops occur and investors have realized that the sell off is too absurd, investors will come back in again and that is when the recovery of the market occurs. And this can happen very quickly and sharply, sometimes within days. Returns catch up and will quickly match closely to the long term average market returns again. This is also based on evidence studied over a very long period of time that goes back to almost a hundred years of data.

Missing the best days

Missing the best 10 days of the best recovery days can significantly impact the overall returns of the markets by almost half the returns over a period of time. So it is best to stay invested for the longer term, turn off the noise on the news and happily go on a shopping spree and buy on a discount when markets are temporary lower for what is needed for the future.

What you can do

If you would like to find out more about the details above and are looking to journey with a financial advisor to take the financial stress away from you through education, we can always have an initial chat to see if there is a fit.