Investing

Staying Calm in a Stock Market Crash

By 03/19/2020 No Comments
Decreasing arrow shows stock market crash

Times are scary

The coronavirus has created an unprecedented global feeling of uncertainty. It is in times like these that we get stock market crashes and the current standings are no different.

Just using the FTSE as an example, this crash looks to be on par with many of the biggest drops in history. We have seen a massive drop in global sentiment, effectively collective opinion, as people are rightfully anxious about how the circumstances surrounding the virus will develop. This results in investors to sell their positions. It is understandable, when faced with something like an unknown and deadly disease, the immediate reaction is to preserve our own. This is why people are hoarding food and amenities, it is also why people sell stocks. While we can’t tell exactly how the virus will progress, we can look to past crashes to see how the market will react. Let’s go over some of these drops and the conditions surrounding them.

Our investing strategy relies on the long-term and slow increase that we see with equities markets. Although, in history the market has increased at an average of 10% a year, that doesn’t mean that the market increases each year.

If we look closely at graphs of the price history of major indices we will see rises and falls, sometimes big and sometimes small. In its history the FTSE specifically has seen 11 crashes, including this year, and the market has always recovered. That is one of the most frustrating things with stocks and shares, its reliance on people’s temperament.

One example of how sentiment isn’t always based on exact data is that one of the current issues bringing the market down is the drastic drop in oil stocks in contrast a crash in 1975 was caused by a sharp spike in oil prices.

Here we have a table from The Times (based on data from AJ Bell) with the time it takes the FTSE to reach a new peak after a drop:

On average this recovery takes around 2 years but as you can see this can vary. The important takeaway is that in relative terms for the market, equities bounce back surprisingly fast!

Next let’s look at the actual figures of these crashes

A bear market is categorised as a fall of more than 20%, and the average drop for each of the 11 aforementioned occurrences is 36%. On average, these markets last for around 1 year.

When we compare this to the bull markets, of which we have had 9, the average rise is 142% and usually lasts around 4 years. This is why the market slowly rises as any drops are always followed by new peaks. The key is that we stick in the market for the long run this will ensure we get the benefits of this bull-bear swing that always favours the bull.

If we try and time the market perfectly, we can end up timing it badly and end up getting the negatives of the bear market without the benefits of the bull market. If we sell in times of worry, we lock in the loss and it becomes much harder to come back into the positive.

So, what can we do?

Not much unfortunately, it doesn’t feel good to just do nothing when things are going wrong but just like with the virus it is probably the best thing we can do. If you are doing a regular savings strategy, like the cappuccino factor, continue putting money in as although they still may go down in the long run you are buying for cheaper on average. Another advantage of using funds is that on average they recover quicker than the market as a whole. If you are doing a stock picking strategy continue your strategy, we knew when we started that markets fall and rise and our strategies are designed to increase despite this.

Unfortunately, it is almost impossible to tell how long exactly a bear or bull market will last, despite the high number of headlines saying otherwise. So, it is best to just ignore the news for now and leave your positions as they are!

References

https://www.thetimes.co.uk/past-six-days/2020-03-15/money/im-betting-my-life-savings-that-the-bulls-will-be-back-in-charge-0d7v8jvdp

https://www.thetimes.co.uk/past-six-days/2020-03-13/business/they-wont-ring-a-bell-when-the-market-is-at-its-bottom-8wkkhz5hx

https://www.thetimes.co.uk/past-six-days/2020-03-15/money/1-529-days-thats-how-long-it-took-for-stocks-to-recover-last-time-jwnlmkr0t

https://www.thetimes.co.uk/past-six-days/2020-03-15/money/stock-market-crash-alerts-will-panic-investors-into-selling-7wz905bzt

© 2019 Financial Investing Trading

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