It’s been a year of ups and downs for the UK stock market. Having started the year at around 4,100 points, it rose to 4,375 in February, only to fall to 4,000 in March. By April it was back up to 4,295, before falling to 3,957 in July. It then rose again to 4,198 before falling to 3,953 by the end of August. Today it is back almost where it started: 4,072*.

Stock market ups and downs are to be expected and are entirely natural. But, as James Thomson, manager of the Rathbone Global Opportunities fund points out, confusing signals around the state of the global economy, cooling inflation, higher-for-longer interest rates and a wild variety of corporate earnings reports are “all ingredients for a ‘kangaroo’ market whose dizzying bounces will probably keep short-term investors on the side lines – in cash or fixed income – as they wait for an ‘all clear’ signal.”

Moments of opportunity

Capital Group says that “If market declines make you nervous, you’re not alone.” But the company points out, that while falling markets can be extraordinarily difficult, “they also can be moments of opportunity.”

The group makes the point that many businesses got their start amid volatile markets and have gone on to become household names. “McDonald’s emerged in 1948 following a downturn caused by the US government’s demobilisation from a wartime economy,” it said. “Walmart came along 14 years later, around the time of the “Flash Crash of 1962” — a period when the S&P 500 Index declined 27%.

“Airbus, Microsoft and Starbucks were founded during the stagflation era of the 1970s — a decade marked by two recessions and one of the worst bear markets in U.S. history. Not long after, Steve Jobs walked into his garage and started a small computer company called Apple.”

Source: Capital Group. As of 30/6/23. Bear markets are peak-to-trough price declines of 20% or more in the S&P 500. Bull markets are all other periods.

“History has shown that strong businesses find a way to survive and even thrive when times are tough,” Capital Group said. “Those that can adapt to difficult conditions and become stronger have often made attractive long-term investments.”

3 mistakes investors should avoid

When markets are volatile – or ‘kangaroo’ in nature – it’s tempting to take your money out and put it into cash instead. The temptation is even stronger today when savings rates are hitting 5%. But trying to time the markets is one of three mistakes Capital Group says investors make during periods of uncertainty. “It’s time, not timing, that matters in investing,” the company said. “Taking your money out of the market on the way down means that if you don’t get back in at exactly the right time, you can’t capture the full benefit of any recovery.”

Using a hypothetical example of US$10,000 investment in the S&P 500 Index made on 1 July 2013 and held for 10 years, Capital group says that staying invested through the two bear markets during that period may have been tough, but a patient investor’s portfolio would have nearly tripled. If that investor had instead tried to time the market and missed even some of the best days, it would have significantly hurt their long-term results — and the more missed “good” days, the more missed opportunities.

Source: RIMES, Standard & Poor’s. As of 30/6/23. Values in USD and excludes the impact of dividends. Past results are not predictive of results in future periods.

The second mistake investors make, says Capital Group, is assuming today’s negative headlines make it a bad time to invest. “Today’s economic and geopolitical challenges may seem unprecedented, but a look through history shows that there have always been reasons not to invest. Despite negative headlines, the market’s long-term trend has always been positive. In fact, great investment opportunities often emerge when investors are feeling most pessimistic,” it said.

The third mistake, according to Capital Group, is focusing too much on the short-term. “Market volatility is especially uncomfortable when you focus on short-term ups and downs,” it said. “Instead, extend your time horizon to focus on the long-term growth of your investments and the progress you’ve made toward your goals.”

Funds to hold for the long term

Investors looking for funds that have outperformed the market over the past decade – investing through the ups and downs – could consider the three global equity funds on the Chelsea Core Selection that have a 10 year+ track record.

Rathbone Global Opportunities

Manager James Thomson will celebrate 20 years managing this fund in November this year. James' high conviction contrarian strategy has proven itself over this time and he has not been afraid to admit his weaknesses or past errors and evolve his process accordingly. He has concentrated on his core strengths, looking to buy innovative companies that have flown under the radar of the main market, identify global themes and invest in them early. Over the past ten years the fund has returned 232%** and, over his tenure, it is the top performing fund in its sector returning 936% - more than twice as much as its average peer and 450 percentage points more than the global stock market***.

Fidelity Global Special Situations

This fund has been run by Jeremy Podger since March 2012 and is made up predominantly of larger companies. Jeremy uses the breadth of Fidelity's global research team to find the best ideas from around the world and holdings fall into one of three categories: corporate change, exceptional value, and unique businesses. The result is a blended portfolio that can deliver consistently through all market conditions. Jeremy has an excellent track record of adding value throughout his career. Over the past decade the fund has returned 198%** and over his tenure it has produced returns of 273%****

Fundsmith Equity

Terry Smith established Fundsmith in 2010 and launched this fund in the November of that year. He set out to be different from his peers, aiming to operate in line with the investor, businessman and philanthropist Sir John Templeton’s adage that “If you want to have a better performance than the crowd, you must do things differently from the crowd.” Terry likes resilient businesses that have high returns on equity and whose advantages are difficult to replicate. "We do not seek to find tomorrow's winners – rather, to invest in companies that have already won," he says. His clear, straightforward process of finding easy to understand businesses without overpaying for them has proved a hugely successful and resilient approach, with outstanding long-term performance. Over ten years the fund has returned 305%** and over its lifetime it is the best performing fund in its peer group, returning 526%*****.

*Source: Google finance, 10 September 2023
**Source: FE fundinfo, total returns in sterling, ten years to 10 September 2023
***Source: FE fundinfo, total returns in sterling, 1 November 2003 to 10 September 2023
****Source: FE fundinfo, total returns in sterling, 1 March 2012 to 10 September 2023
*****Source: FE fundinfo, total returns in sterling, 1 November 2010 to 10 September 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.