Ideas Farm: Bear market silver linings

Last Saturday, our colleagues at the Financial Times reined in the last of the holiday cheer with a reminder that 2022 was poised to finish with more than $30tn (£25tn) wiped off public markets.

The figure is at once verifiable ($25tn and $9.6tn from the market value of global stocks and bonds, respectively), an incomplete reflection of portfolios (private assets are notably absent) and too large to conceptualise ($35tn is around third of global GDP, per the World Bank).

Despite its size, the figure is unlikely to have caught many FT readers off guard. Indeed, few will have failed to notice that last year was a rough one for asset owners, and the “heaviest [annual] loss in asset markets since the global financial crisis”.

It’s almost enough to put a newbie off investing altogether. After all, shrunken risk appetites have hardly disappeared; from our January vantage point, markets look much the same as they did before Christmas. Maybe another $30tn will vanish in 2023.

However, while the headline figure is daunting – and the recent trajectory undeniably downward – it’s worth considering what this number meant for the average UK-based private investor in 2022.

Defining ‘average’ is of course tricky, and will depend a lot on age, employment status and risk tolerance. Anecdotally, retail investors were fond of racy stocks and pricey sectors at the end of 2021, suggesting they might have been hit harder than your average fund manager. But given the infinite range of sector and style preferences out there, as well as the ubiquity of passive products, it’s probably safer to assume benchmark returns broadly represent the average experience.

Still, whether you are a newly employed 21-year-old tiptoeing into financial markets, or a retiree with a £1mn portfolio, the past year’s bear market hasn’t been quite as atrocious for UK investors as it first appears.

To show this, we need look to the performance of two popular and liquid ETF proxies for the public markets listed above – Vanguard’s Global Aggregate Bond (VAGS) and FTSE All-World (VWRL) equity funds – both of which have sterling-denominated share classes (other low-fee passive giants, as well as plenty of other index-imitating funds, are available).

Assuming you had your entire portfolio in these two funds at the start of 2022, and decided not to trade all year, the worst a UK investor could have done was lose 13 per cent in sterling terms. The more equity-heavy your portfolio, the better it did. A classic 60/40 allocation to bonds and equities, split between the two funds, would have resulted in a 9.5 per cent total loss. Bad, but not terminal.

The picture looks far less bad for someone who invested regularly. Whether you were adding £500 to the funds each month from your salary, or cautiously drip-bought a lump sum throughout the year, cumulative losses are unlikely to have exceeded 5 per cent. If you simply bought VWRL on the 11th trading day of each month of 2022, you would be up 0.4 per cent.

Two reasons explain the relative shelter. One is currency: sterling went on an often-painful ride in 2022, ultimately settling around 11 per cent down on the dollar for the year. Having worked very well over the past decade, a global approach to stocks had its virtues for UK buyers in 2022, too. Another is the importance of dividends and coupons when markets are falling. Exclude these from market values, and you eliminate a good chunk of investor returns.

Straw-clutching? Perhaps, especially when you factor in inflation’s impact on 2022’s real returns. But it’s also worth remembering the mitigating effects of diversification and income when markets look their worst. All is not lost.