Investors could end up waiting for anything between two to five years for the FTSE All Share to return to its previous peak – if the three biggest crashes in the index over the past 40 years are anything to go by.
The FTSE All Share is currently down more than 30 per cent from its highest point this year. However, anyone hoping for a quick rebound is unlikely to be encouraged by previous market recoveries.
September 2000 marked the start of the longest bear market seen by the index. Anyone unlucky enough to invest in the FTSE All Share at the peak of the dotcom bubble would have had to have waited until December 2005, or 63 months, for their investment to return to its starting price – and that’s with dividends reinvested.
Biggest crashes in FTSE All Share since 1980
Source: FE Analytics
Aside from the bursting of the dotcom bubble, this bear market was compounded by the March 2003 invasion of Iraq – which was when the index bottomed out, with peak-to-trough losses of 45.42 per cent.
While the financial crisis had a much wider impact on the world economy than the dotcom bubble, the market managed to recover more quickly from the resulting crash. Someone who invested in the FTSE All Share at its peak in October 2007 would have had to have waited just over three years – 38 months – before they were back in the black in total return terms. It took 17 months for the market to bottom out, in March 2009, when it was down 45.28 per cent.
The Black Monday crash of 1987 stands out as something of an anomaly.
While the maximum drawdown of 35.89 per cent was lower than that seen in the dotcom bubble and financial crisis, it was the speed of the drop that caused so much panic: it took just four months for the market to bottom out, including an 11.09 per cent fall on Black Monday of 19 October, which followed a 9.88 per cent drop on the preceding Friday.
Although the market took far less time to recover, someone who invested at the peak in 1987 would still have been waiting for two years to see any sort of return on their investment.
The reasons for this crash are harder to pin down – it has been blamed on early forms of computerised trading and portfolio insurance, which exacerbated a long-overdue correction.
But this is just for the UK – what about the rest of the world? The biggest crashes in the FTSE All Share correlate closely with the biggest crashes in the MSCI World index over the past 40 years.
For example, the MSCI World index fell by a similar amount to the FTSE All Share in 1987, however its slump lasted only 19 months rather than 24.
Previous biggest crashes in MSCI World index since 1980
Source: FE Analytics
It fared much worse in the bursting of the dotcom bubble, however, and failed to fully recover by the time the financial crisis started to unfold. Data from FE Analytics shows that someone who invested in the MSCI World index at the worst possible moment in September 2000 would have had to have waited until March 2010 to get their money back – almost 10 years. The closest they would have come before then would have been in October 2007, when their total loss would have stood at just 2.81 per cent.
Index's longest period in negative territory
Source: FE Analytics
FE Analytics data on these indices only goes back to 1986 in the case of the FTSE All Share and the mid-1970s for the MSCI World index. There is data available elsewhere on the US that goes back much further – and here there is some much better news.
Invesco examined data going all the way back to 1956 and found the average length of a bull market is 55.1 months, while the average gain is 153.71 per cent. This is compared with an average length of 11.7 months for a bear market and 34.33 per cent for the average loss during such a period.
Meanwhile, in the blog A Wealth of Common Sense, Ritholtz Wealth Management portfolio manager Ben Carlson carried out research into the 25 biggest monthly declines on the S&P 500 going back all the way to 1926.
He found that in 56 per cent of cases, the index was higher a year later, with an average gain of 14.3 per cent. Three and five years later it was in positive territory 72 and 80 per cent of the time, respectively, with average gains of 42.5 and 94 per cent.
The big outlier here is the Great Depression – nine of the 11 occasions that stocks were down one year after a large monthly loss were in the 1929 to 1933 period.
While the classic piece of investment advice is to ‘buy when there is blood on the streets’, Carlson said this is much easier said than done.
“Buying stocks when they’re rising is easier because every purchase makes you feel like an investing genius,” he explained.
“Buying stocks when they’re falling is harder because almost every purchase makes you feel like an investing fool.
“Buying stocks when they’re seriously falling, as they are now, rarely feels like the right move.
“Every investor is told to buy low and sell high. But most don’t realise that buy low typically works out to buy low, then buy lower, then buy even lower, and once you really hate yourself, buy lower than you thought was possible.
“This is the low part of buy low. We’re in it. I don’t know how many pegs lower we have to go (if any). No one does.
“The (potentially) good news is the lower we go, the higher the expected returns should be.”