We’ve experienced a once in a hundred-year combination of events, with the global pandemic, recession fears, rising inflation and interest rates, the war in Ukraine and the farcical situation of five changes of British Prime Minister in just six years!
With that backdrop, it is no wonder markets have struggled, but there are several interesting statistics to show that now may in fact be a good time to invest if you are holding excess cash.
Falling markets mean the growth outlook has improved
The first point is counterintuitive, but the 2022 market declines have actually improved growth expectations.
For example, Vanguard, the second largest fund manager in the world, has recently revised its growth forecasts upwards and believes that investors will now be better off over the next decade than if 2022 had not occurred.
Vanguard’s growth forecasts for global equities are now 7.4%-9.4% over the longer term.
The fall in bond prices in 2022 has similarly resulted in better growth expectations, as lower prices mean new investors are now enjoying higher levels of income yield.
2022 was very rare in investment terms
Bonds and shares/equities tend to move in different cycles i.e. if shares are falling in value, investors seek the relative safety and income of bond investments and this causes bond prices to increase in value.
However, this relationship broke down in 2022, being one of only three years in the last 45 where shares and bonds were down at the same time – the chance of this happening going forward is low.
Two consecutive years of stock market falls is rare
Data from NYU shows that the chance of having two consecutive years of stock market declines (as measured by the US S&P 500 index) is low. The chance of 2023 being negative is just 9% based on this data.
Short periods to recover losses
Figures from Gugenheim have examined previous market falls of between 20 and 40% and found that the average time to recover the losses is just 14 months.
With global markets starting their declines in late 2021, based on this statistic we would be nearing the end of the downturn in markets.
Equities outperform cash over different time periods
Some investors perceive cash as more secure than shares. However, data from Blackrock shows that shares (S&P 500) outperform cash (Treasury bills) over many different time periods, even short time horizons.
The statistics I found particularly interesting are that, even on a short-term basis, shares would outperform cash holdings, for example 64% of the time over one month and 81% over one year.
Time is on your side
Data from Macrobond covering the 1971 to 2022 period shows that time is on your side with investments.
Over any one-year period, the chance of generating a positive return is 72.8%, but if you extend the period to 10 years the chance of a positive return increases to 94.2%.
These statistics of course are not a guarantee that markets will recover in 2023, but the convergence of all these factors is, for some investors, a positive indicator for the direction of equity returns for the year or two ahead.
More important though is that short-term market events should not be a distraction when implementing a long-term investment strategy.
We can guide you on how and where to structure your investments efficiently as a Portuguese tax resident, whether or not you are a Non-Habitual Resident, and how to futureproof these investments from changes in your personal circumstances.
Debrah Broadfield and Mark Quinn are Chartered Financial Planners (level 6 CII) and Tax Advisers (ATT) with nearly 20 years of combined experience advising expatriates in Portugal on cross-border tax and financial issues. For a complimentary initial chat contact us at: +351 289 355 316 or firstname.lastname@example.org. Find out more at www.spectrum-ifa.com
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