Investing can be a great way to grow wealth over time, but it’s not always a smooth ride. Markets move up and down, sometimes dramatically, and this can be pretty disconcerting. Given the recent falls, we wanted to discuss why markets are volatile and what it means for investors.
Over the long term shares tend to outperform cash…
We’ve written in other articles about the relative performance of investing in shares versus saving in cash but it is worth repeating up front: history suggests that, over the long term, shares outperform cash with greater out performance over longer time periods. For example: Barclay’s 2024 Equity Gilt Study showed that for UK equities over the last 130 years, the probability of equities out performing cash over any two years was 70%, and 91% over 10 years.
Such comparisons always come with the caveat that history is not a good guide to future performance. Ie: just because something has happened in the past does not mean it is guaranteed to continue to happen and there are many examples of companies with high flying share prices which then collapsed or periods when the stock markets fell or were flat.
Underlying the growth in stock markets over time has been economies and companies within those economies growing over time. It is worth remembering that when you invest in a market tracker fund or a diversified portfolio, you are essentially investing in lots of individual companies who continue to produce products and services to meet their customers’ needs and strive to grow their businesses.
…but markets can go up and down
The other caveat you always see is “capital at risk”. Ie: stock markets and companies' share prices can go down as well as up. Market downturns can be triggered by events such as economic uncertainty, global crises, or major company failures affecting investor confidence about potential future growth. These declines can sometimes be quite rapid: as confidence about the future falls, people react quickly - selling investments in an attempt to protect their money. This rush to sell can create a domino effect, pushing prices down further in a short period of time.
A recent example of this was the COVID-19 pandemic. In early 2020, global stock markets fell sharply as lockdowns and economic uncertainty spread. The FTSE 100, for instance, dropped by over 30% in just a few weeks.
Falls can also occur after a period of higher growth in share prices: investors worry that the market may be reaching a “peak” so anything that triggers a change in sentiment can cause a rapid correction. Over the last month (19th February ’25 to 19th March ‘25), the S&P 500, the index of the top 500 companies listed on US Stock Exchanges, has dropped by 7.5%. These falls in the S&P 500 since February came after several months of growth but actually it is just back around the level it was 6 months ago and is still up over 40% over the last two years since 19th March ’23.
As an aside one question we are sometimes asked is “could I lose everything if I invest?”. If you invest in one company, the answer is obviously yes as companies do go bust. However, if you invest in many companies through a diversified portfolio or a market tracker, it is hard to imagine a scenario in which all the companies go bust at the same time.
What does this all mean for investors?
Despite the rises over the last couple of years, if you had made a new investment in the S&P 500 over the last 6 months, the value would have fallen because the market has fallen and at the moment you will be looking at losses. This illustrates a couple of important points.
- In the short-term markets can rise and fall, sometimes significantly. This can obviously be very unsettling and if you are uncomfortable with this then you may be better saving through cash rather than investing. It is also the reason why most experts say that you should not use investing for short term saving or for money that you absolutely cannot afford to lose: if you need money in a hurry, you may be forced to sell at the wrong time.
- Investing is about the long term. Historically, major stock markets have recovered from downturns over time, and long-term investors who stay the course have often benefited. That said, future market performance is uncertain and there is no guarantee this will continue so you should only invest if you are comfortable with the risks.
This long-term perspective is especially important when saving for a child’s future with a Junior ISA. Money in a Junior ISA is locked away for up to 18 years giving your child’s savings the opportunity to grow over a long period of time. At Beanstalk, we believe in making investing simple and accessible. A Junior ISA is a great way to give your child a financial head start and by keeping a long-term perspective, you could potentially help them benefit from investing over time.