How to stop worrying and learn to love market volatility, by investing expert ANDREW CRAIG
Andrew Craig is the author of How to Own the World, the founder of Plain English Finance, and manager of the VT PEF Global Multi Asset fund.
When we see a market crash, the usual market commentators line-up to share articles using lots of clever (and often entirely sensible) charts and graphs – either to tell their readers to buy, or to sell.
But when you see pieces like this, you have to stop for a moment and think about the motivation of the author.
If they're working for an investment bank, for example, their motivation is to get clients (big investors) to trade – because that is what generates commissions for their business.
The reality is that no-one knows whether there will be a crash or when there will be one.
The best that market commentators can do is look at history (because it 'rhymes,' as Mark Twain would say) and try to work out what might happen in future.
But this is an incredibly imperfect and unreliable thing to do, and most people get it wrong.
Enter ergodicity…
The main reason for this is that financial markets are not 'ergodic'.
Poker is ergodic. Roulette is ergodic. That is to say that there is a fixed set of outcomes and probabilities inherent in the system – so many cards or numbers for example.
Financial markets are not ergodic – in that there are too many variables and unknowns and the system is not 'closed'.
I believe the main reason for the strength of the S&P in recent years, for example, has been to do with how the rules changed for US Fortune 500 pension funds and the rise and rise of passive investing (thanks in the main to the lobbying efforts of Vanguard and BlackRock).
These things never happened in the past (i.e., massive, forced fund flows from nearly all pension investors in the US into a market cap weighted ETF, driving MAG 7 stocks and the S&P ever higher).
Another case of history repeating?
History is circular (and rhymes) to a certain extent, but it is also linear, and this is actually more important and powerful – in that we are making progress all the time and doing things as a species that we never did before or last time there was a 'crash'.
If you compare what financial markets did in 1929, or 1987, to today, you might be able to improve your chances of calling markets a bit.
However, the world is completely different now to how it was then, so things will probably unfold differently - particularly when you consider interest rates and monetary policy too.
There was also no internet and there were no smart phones 'last time,' making today very difficult to compare to yesterday in any particularly meaningful way.
How do all these factors which are unique to 2025 change things? There are just far too many variables in far too much of a complex system.
For me, that means that the best thing to do is to invest every month and make no attempt to time the market at any point in your investing career.
In doing so, you need to 'own the world' to capture all that human progress, and you need to 'own inflation ' because it is factually true that governments all over the world are running fiat monetary systems which increase the money supply each year – and now more than ever.
Master the vol
You also need to deal with volatility to ensure that your risk is calibrated appropriately for your lifecycle - because losing 50 per cent of £10,000 when you're 30 is a very different problem to losing 50 per cent of £1m when you're 60.
The most important things to do with respect to this, are to invest every month in a small number of funds for at least five years. This is the time period you need to maximise the chance that you will be up, no matter what happens in markets in the meantime - particularly if you're buying in monthly.
You then tweak your allocation (based on 100 minus your age) and do that again for five years, and again and again for as long as you can.
If there is a 'lost decade' in equities coming – this probably won't matter that much if you are doing this, because when the crash comes, you will be buying every month thereafter. If equity markets do fall e.g., 50 per cent from here – you will then be picking them up at half price that month and at lower prices every month from then on as they build back up again.
Over the very long run this means you will be highly unlikely to suffer a 'lost decade' yourself.
(Over)thinking this stuff is the reason why most investors return several percentage points lower than market returns (of course people in cash who don't invest at all - the majority of the population sadly - make far less than that – they actually go backwards in real terms).
There is plenty being written about how the current situation looks quite a lot like the 1970s, with the horrendous situation in Ukraine and the very real threat of stagflation.
But it is our considered belief that implementing a sensible strategy of buying the right mix of 'aggressive' versus 'defensive' assets based roughly on your age and stage, and doing that regularly over a lifetime of investing will more than likely deliver a great outcome, almost no matter what is going on in the meantime.
The key thing is to remove any element of market timing from your thought process, get the mix right, and stick to your plan over very long periods of time.
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