Due to the lack of anything better, historical figures still provide the best basis for saying anything about what will happen in the future. The graph below shows what the largest falls in the Oslo Stock Exchange have been like – from top to bottom and back to record levels (statistics since 1983).
Rapid fall – rapid rise
The troughs in 1987 and 1998 were reached after short but sharp falls. The
stock exchange took only three months and five months respectively to bottom
out in these years. Recouping the fall – ie, regaining the former peak
– took 15 and 17 months respectively.
Slow fall – slow rise
The market took much longer to bottom out in 1992 and 2003 – 25 months and 29 months
respectively. Recouping these falls took 17 months and 23 months
respectively. The torment which lasted from the top to the bottom at the
beginning of the millennium unfortunately led to some people ruling out
shares and equity funds as a profitable way of investing money. The upswing
which followed, after the peak in 2000 had been equalled, showed that this
was not true. The Oslo Stock Exchange Benchmark Index rose by a further 116
per cent before reaching a temporary peak in 2007.
So what will happen this time?
Nowadays, there are many indications that we are more or less at a new bottom.
So how long will it take this time for the stock exchanges to recoup what
they have lost? Since we do not know what tomorrow will bring, we must rely
on historical figures. It took 15, 17, 17 and 23 months respectively to
recoup the four previous stock market falls. It took 19 months for the stock
exchange to regain its value after bottoming out in 1972 (not shown in the
graph) (sources: First Securities and the NHH index). The five falls in the
market took an average of 18 months to go from the bottom back to their
previous records. That is perhaps the best estimate of how long it will take
on this occasion. Time will show ...
Downswings and upswings with a savings agreement
Equity funds are designed to increase capital in the long term. For most
people, the advice is to invest money over time with the help of a savings
agreement and sell investments over time using a withdrawal agreement. During
a long savings period (for example when saving for retirement), you must put up
with many large and small falls in the market. Over time, the compensation
for this is a higher estimated return than on other investment instruments –
historically speaking, the annual return from shares has been four to six
percentage points higher than that from bank savings. In addition, with a
savings agreement, a fall in the market leads to you buying more units from
one month to the next compared to what you would otherwise have done. You
benefit strongly from this when share prices rise once more.
New records will follow
We do not know what it is that triggers a fall in the market until it has
actually happened. Nor do we know how much the stock exchanges will fall,
how rapidly they will fall or how quickly they will regain their value. However,
what we do know is that there will always be new records – driven by the long-term
value creation in companies. That means you should save in equity funds both regularly
and with a long-term view.
