151- Is A Market Crash Around The Corner?

The Never Ending Worry Service is rife at the moment with conjecture that 'the market has peaked' and 'a downturn is around the corner'. It might be. It mightn't be. We cannot know for certain. But looking at the data it tells us that just because we're currently at a market high that is not to say the market cannot get any higher. 

Benjamin brings this to life with some numbers in this episode, 151. 

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Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

SPEAKER_00 0:12

Hello money nerds and welcome to Heads Up on Money. You might have to excuse my slightly choked, slightly raspy voice this week. I have had the dreaded man flu. I die I digress, it's probably not been as bad as that, no matter how much I've tried to demand sympathy from Hannah. I need to be cracking on with this, so I thought why not dig out the podcast mic and record episode 151 of Heads Up on Money. No time like the present. So how are you, money nerds? I hope you have all had a nice week. It's been almost like summer again in Edinburgh here, which has been amazing. We've had a couple of cracking days this week. It was also Hannah's birthday yesterday, so took a bit of time off to do some fun things as well, which as you know, Money Nerds is what it's all about. That's what wealth planning, financial planning, tax planning, investment management, all the guff that we talk about weekly on Heads Up on Money. It's really so that it frees you up to do the important things in life. So what am I going to be ranting about this personal finance Friday? It's going to be a shorter one, slightly less technical one than we've talked about maybe in episodes of pasts. But episode 151, I'm going to talk about why the fact that we have reached perhaps the peak in a stock market doesn't mean that a crash is just around the corner. It doesn't mean that things will not go from good to even better. So if you stick around to the end of this episode, hopefully you will be armed with the knowledge and what the data has taught us because we always rely on data when it comes to our investments. We don't rely on conjecture. Why on earth would you do anything else when it comes to the management of your family's money? The data tells us that we should not be concerned about everything we're hearing in the never-ending worry service that is the financial news about the fact that surely everything is overvalued, surely the crash is coming. So let's get into this one. Episode 151. Is a market crash just around the corner? So I've included that little that little bait because that is what you're probably hearing and reading in the never-ending worry service that is the financial media and news. Is portfolios have done phenomenally well over the last few years. Of course, there's been some dips, and we would expect such dips, part and parcel, of investing, but they've been pretty minute, and as a result, investors have had a pretty nice investment journey over the last few years. You may also even argue that the last, if we call it, more significant financial crash was back in COVID times, and even then we didn't really have much in the way of a crash. Things rebounded far quicker than any of us would have foreseen. So we're probably going back to the financial crisis about nearly 20 years ago, since we've seen a significant crash. Now, this brings a problem for many investors in that you can become a little bit too accustomed to things always becoming rosy and assuming that investing is almost risk-free. Now, I'm not doing a complete U-turn on the messaging I try and convey every week, money nerds. I've not suddenly going to go back on everything I have said over the last 150 episodes. Investing is almost risk-free when you've got a suitable investment time frame to invest, and losses are only losses if you actually do anything about them, otherwise, they become paper losses that are immaterial and inconsequential to your financial plan. But that said, you do need to remember that investing does come with some short-term volatility. And why I'm talking about it in this episode is because we've almost become accustomed to assume that that volatility is always going to be inconsequential. But there will be times in our financial plan where the rebound is fairly significant, and we shouldn't be concerned when that inevitable outcome does happen. So when is it going to happen? Well, I don't know, sadly. And I wish I did because it would make the financial plans I create for clients much better and easier to plan around, but we can't know. And anyone that does tell you is lying to both themselves and to you. So approach that with caution, money nerds. If you're working with an investment manager, a financial advisor, and there's strong predictions as to what's going to happen in markets over a certain period of time, it's all BS. And I'm saying that because I'm on the inside there, I work in personal finance, and there's lots of value that financial advisors, investment managers can add to your financial plan, but sadly, predictions around market movements is not one of them. So we need to remind ourselves that market declines, they are going to come. And this is feeding through at the moment into the mainstream media because of the fact that we've had such a rosy time when we've been investing. Things have been so good of late, and it's almost been a bit jarring, a bit unsettling, because a lot of the media circling on the let's say on the right hand side of this analogy, we've been talking about things like the Iran war. We've had obviously the ongoing tensions between Russia and Ukraine, there's been increases to oil prices, lots and lots of negativity, and somehow our portfolios have kept on advancing, they've kept ticking along and delivered end investors stellar returns. So naturally, as human beings, typically British pessimists, we assume that surely the train is going to crash at some point. And it's amplified by the issues that are being portrayed in the US with typically you know um stocks that are heavily exposed to IT industries, to technology, with ridiculous valuations that somehow have become beyond possible profitability. There's a lot of goodwill built into that, and as a result, there's just this growing trend that surely a crash is round the corner. Now, parking, the issues with global stocks and the concentration to tech stocks, that's not something I'm going to talk about in this week's episode. I do have an article on my website, headsupwealth.co.uk, if you want to read anything more on that. But what I'm talking about in this episode is this rhetoric that there's going to be a decline that's just around the corner, and that you should be prepared for that and hesitant and really, really approaching your investing with trepidation at the moment because things have been too good for too long. So that means that things will not get any better. In other words, is the peak that we're currently at a cliff, and things are going to turn pretty much south very soon. Well, obviously, the purpose and why I'm talking about it in today's episode, and we'll bring it to life with some data, is that a stock peak isn't necessarily a cliff. Just because things are doing well now, and just because we have reached a inverted commas stock peak does not mean that a subsequent higher peak will be reached. We cannot know. And acting like things are doing too well and we're going to put the brakes on now because there's going to be a downturn coming, it surely must be coming. Acting like that could actually inhibit your potential for further growth. If you think of someone two or three years ago who suddenly felt the Russia-Ukraine conflict was going to have a catastrophic impact on markets, so they took their foot off the gas at that point, waiting for the inevitable crash to come, they would have missed out on significant investment growth snowball effect of compounding over the last number of years. So there's nothing to say at this point in time, at the time that we are reflecting on this now, being June 2026, there's nothing to say that over the next two to three years things are not going to continue on the rosy trajectory. Of course, the exact opposite might be true, but there's nothing to say that that is the case, other than it being fueled by investor irrationality and just our inherent pessimism that we think things are surely going to turn. So bringing this to life with some data is I've looked at some analysis which is done by a US fund manager manager called Dimensional, which form a fairly significant part of the portfolios that I would use for my clients because Dimensional believe in all of the things that I talk about that being in the market outperforms beating the market and trying to time markets, and instead you're relying on capitalism and markets doing their thing over the long period of time. So they've provided a really, really helpful piece of literature looking at the data, crunching the evidence, not conjecture, but actually looking at how have markets performed in terms of times when markets are doing really well and times when markets are not doing so well. And then looking at the associated growth under each of these scenarios. So what did Dimensional look at? Well, they looked firstly at 1,000 monthly market ends for the SP index between 1926 and 2022, was what their study was carried out. And they found out that typically 30% of the time, the monthly observations they made of the SP were new market highs. And this is what we see when we look at long investment periods, we can see that the trend line is from the bottom left to the top right, is there will be volatility along the way, but generally speaking, the advance is upright and permanent. So what they looked at then was after those highs had been reached, what was the typical annual return one year later, three years later, and five years later, when a market high had been reached, versus just the one, three and five year return after months that just ended at any level? So it's not necessarily a market high, it's just any level of value that the index reached. So what we're looking at here is is there some kind of significant evidence that tells us that once a market high has been reached, that the returns that will be experienced one, three, and five years later differ materially from another point or another standpoint when a market high has not been reached. Because if we are to believe the rhetoric in the never-ending worry service that is the news, it should surely tell us that the returns we have seen once a high have been reached are few and far between in comparison to any other level. Surely it's not possible that once a high has been reached, that another high gets reached thereafter. And the evidence pretty much is conclusive to tell us that there really is close to no difference. And if I go through the actual numbers with you, it's it's difficult to visualize in a podcast. I appreciate money nerds, but if we compare dataset one with dataset two, dataset one is plotting the returns from a market high, and dataset two is just plotting the average returns from any other level that's not categorized as a market high. One year later, the market returns for a market high dataset one was 13.7%, and one year later from any other level was 12.4%. So in a one-year basis, it actually tells us that the returns typically from a market high are indeed better. But we try and not focus on one-year returns, we bring this out longer because in reality we are long-term investors. If we look at the three years data, the differences between subset one and subset two is 0.1% because there's 10.6% average return in the case of a market high having been reached, and a 10.7% return in the case of any other level, non-market high data point. And if we extend it out to five years, it's exactly the same. There's a 0.1% difference, 10.2% months that ended at a record high, and 10.3% in the cases that they ended at any other level. So there's there's no material difference in the data here. So what we're actually seeing is the returns were close to the average returns over any given period of the same length. So just because that market high had been reached, the subsequent performance of the markets didn't exhibit any typical deviation from what normally happens in normal investment times. And this reinforces all of the messaging that I try and convey every week, money nerds, is that what goes on in your portfolios often will have close to no bearing on what is happening in the never-ending worry service that is the news. And the stuff that does actually trickle through into your portfolio should only have a short-term impact because news is just short-termism. The actual underlying fundamentals of the companies that you're invested in, the global equities that your portfolio is made up, will have no real bearing longer term on what you're reading about or listening to in the shorter term. So this evidence from Dimensional really reinforces that just because things are good right now, just because we are reaching market highs, does not mean things will not go any higher. It doesn't mean that there's a surefire bet that we're going to increase and you should put all your money out on the table and there's going to be consistent rallies and there's no possible downturns because that also is ignorant. That is not the nature of investing. But if you have a sufficient investment time frame beyond, which you should do as a diligent and sensible investor, we don't invest for the short term, we save for the short term, we invest for the long term. This data should really give you the confidence to know that next time you hear some negativity in the news, next time that someone tells you there's a crash just around the corner, I'm just waiting for it to happen. If you go back to what the data has taught us, what the analysis tells us is that what is happening right now, whether we've reached a high or not, it is inconsequential in the grand scheme of things. So you money nerds need to remember that because that is what separates the irrational, the emotive investors from the rational money nerd investors that listen to heads up on money and recognize that investing is very much a science in many ways, looking at what the data has taught us and removing your emotions from that as largely as possible. So hopefully this has given you confidence. You can now tune out the never-ending worry service, the speculation that there's a market crash just around the corner, knowing that if it does happen, if a crash is just around the corner, the return that's going to be seen from there onwards over the long period of time when it all is equalized out isn't going to differ much from had you invested at the market high. So if you have the capacity in your financial plan to take investment risk, and as I always say, risk comes from not investing, not investing, if that makes sense, if you have the capacity to take that risk, you've got the ability to stomach short-term volatility, and you've got surplus cash, be that a monthly basis or a lump of capital that is not working for your financial future, there is nothing to say that investing that now, in terms of in the long-term returns, isn't going to be any less beneficial than waiting for the inevitable market crash that you think is just around the corner. Because it might be just around the corner, or it may be months or years away. We do not know, but this data tells us that that really shouldn't matter too much. So I'm going to wrap it up there, money nerds, before I choke or sneeze whilst recording this episode. But I do hope that has been helpful. I wanted to record it because there's so much I'm reading at the moment around this matter, around the fact that things are so good, surely they must be turning bad now. And I wanted to give you a little sprinkle of optimism this personal finance Friday. Encourage you as always to look to the long term, keep your eyes on the long-term prize and remember what the wealth is actually there for. Don't get dragged down into short-term speculation. It can be harmful to your financial plan and it's also just not worth the headache. So anyway, have a have a great weekend, money nerds. I hope this episode has been helpful. Please do share it with your family, your friends, your loved ones if you think it would be of interest to them. And of course, if you haven't already, please do like and subscribe to the show so that you get the episodes freshly baked into your podcast streaming app of choice every personal finance Friday. And the last reminder from me is if you haven't already, please do sign up to my mailing list. I'll give you personal finance updates without the guff, without the waffle that you would normally expect. And I promise I do not spam you. I'll only send you stuff that is of interest and actually consequential to your finances. You can find the information in the episode show notes. I've been Benjamin Mitchell. You've been the Money Nerds. Thank you as always for listening, Money Nerds, and I'll see you next Friday. Take care and enjoy the weekend. Bye for now.