Page 45 - DIY Magazine September 2018

This 25% loss is referred to as the drawdown, which is defined as the percentage loss from a previous peak; the concept is common in trading but can also be useful for investors.
The following chart shows the drawdowns for the FTSE All-Share for the period 1969-2016.
The first thing to notice about the chart is that there are an awful lot of drawdowns!
In fact, because the market doesn’t make new highs every day, it is usually in a drawdown state. And this can have a psychological effect on investors.If you look at a typical long-term chart of the stock market, and many individual shares, you will usually see a line that starts
at the bottom left and increases (moderately steadily) to the top right.
This is a good thing – stocks go up in the long term! However, this chart does not necessarily reflect the actual experience of being invested in the market over this period; for this, the drawdown chart above may more accurately represent the feelings of investors. This is because investors’ portfolios are underwater for most of the time, i.e. the portfolio value is below its peak value (which will likely be a recent and strong memory for the investor).
The table below shows how long the market spends at various drawdown levels. So, for 16% of the time from 1969, the market had a drawdown of 5%-10%, and it was in a drawdown state of over 20% for 27% of the time; and, while a drawdown of just up to 5% may not seem very much, in practice it is 31% of the time that investors are likely feeling slightly disgruntled, having ‘lost’ money.
So, while the data shows us that stock markets increase over the long term, the direct personal experience of investing may be for investors largely that of a prevailing sense of loss. This sense of loss is something that investors have to learn to live with.
BUY NOW
www.harriman-house.com
MAKE SURE YOU DON’T MISS AN ISSUE; CLICK HERE TO RECEIVE DIY INVESTOR MAGAZINE TO YOUR INBOX
45 DIY Investor Magazine | Sep 2018