FAQs on market crashes

You haven’t lost anything unless you sell.
If the paper losses are making you uneasy, consider not checking the value of your investments while all this blows over. Out of sight, out of mind. Image: Bryan van der Beek, Bloomberg

Let’s not sugar-coat it, the markets have received an almighty PK (player kill) over the last few weeks. It’s been pretty brutal with nowhere to hide. The JSE Top 40, S&P 500, small caps, large caps, Reits (real estate investment trusts), offshore, onshore, and every other investmenty-sounding term have all been walloped. Proper.

This has meant a lot of people have seen their net worth take a bit of a hammering – mine included. I will do a proper stock take (excuse the pun) at the end of the month when I update my FIRE Tracker but I reckon the latest happenings have put my investments back to where I was three years ago.

Of course no one wants to see their investments plummet. And with the media in overdrive, the possibility of this getting a whole lot worse seems certain. How much poorer are we going to get?

Many people are understandably looking for something to help take the pain away, and filled with more questions than answers. As a result my Twitter and Facebook pages and my email have been getting a fair amount of TLC.

The questions are all pretty similar, so I thought I would talk around some of the main themes I am seeing.

Should I change my investment strategy?

The huge drop in investment values has many people scratching their heads thinking there must be a better way. Time for an investment strategy update?

But here is what you need to ask yourself – would you change your investment strategy if the markets were still where they were at the start of 2020?

I think you know the answer to that.

Your investment strategy was based on many factors which you (hopefully) carefully considered. You gave some thought to your time frame. You considered your risk appetite and pondered your goals and targets.

From there you thought about how best to implement your investment strategy by tackling the many things within your control: how much you invest, your asset allocation, onshore versus offshore, reducing fees, making use of tax-efficient investment vehicles and so on.

Why then do you want to suddenly change your entire strategy based on the one thing you cannot control – the level of the market?

That is something that is well and truly out of your hands, and it really shouldn’t be any sort of factor in your investment strategy.

So what am I doing?

My investment strategy says buy my chosen selection of exchange-traded funds (ETFs) month in and month out. So come end of the month that is exactly what I will be doing – buying the ETFs I would have bought anyway, with the added bonus of them being super cheap.

So basically I get the same ETFs I would have bought anyway, but at a lower price.

It’s sort of like when you go to the shops to buy milk, and instead of it costing R24 a bottle it’s only R16 – the exact same milk, at a much better price.

I also learnt long ago that stressing about something that is out of your control is pretty pointless. So while the market tanking might be disturbing, there isn’t anything I can do about it.

I have lost Rx

Yes, I am with you – it’s not lekker seeing the value of your investment in free-fall. It really can make you feel like you should get your money out asap. Isn’t investing in the stock market supposed to generate inflation-beating returns and make us wealthier, not poorer?

I fully understand the urge to stop the pain and sell your investments. But trust me when I say that is the worst thing you can do.

As you know, in life there is nothing for nothing. This feeling of discomfort and the need to do something is the price you pay for your equity investments to make you wealthier over the long term. People who are not able to stomach the paper losses, and end up selling, find themselves far worse off than those who ride this out and continue investing, despite their portfolio taking a smack.

It’s not easy, but the rewards will be worth it.

Remember you haven’t lost anything unless you sell. And since you invested in equities, it means you do not need the money for many more years. So there is no need to sell now.

In investing there are only two prices that matter: the price you bought at, and the price you sell at (everything in between is just noise). The great news is that current levels mean you have a great opportunity to lower the price you buy at, which means you will get to enjoy a better return when you do eventually sell many years from now.

So what am I doing? 

In short, nothing. The ‘losses’ aren’t pretty to look at, but I am taking comfort knowing that I am lowering my average purchase price by buying while the market is down. But if the paper losses of your portfolio are making you uneasy, consider not checking the value of your investments for the next few months while all this blows over. Out of sight, out of mind.

This time it’s different

During every single market crash people say: ‘This time it’s different’. And you know what happens after every ‘different’ market crash? The exact same thing.

Within a few years (and sometimes even months) the markets recover. In fact, returns after a crash are usually super-awesome. Check out this cool table shamelessly stolen from this blog post here.

Source: A Wealth of Common Sense

The average three-year return following a crash was a very awesome 88.6%, and after five years a whopping 132.3%. A few years after a crash, people look back and think wowziz that crash was a fantastic opportunity to get in. This time is no different.

People, the coronavirus is bad, make no mistake, and businesses and economies the world over are going to take some serious strain – absolutely. But this will eventually play out, and we will come out of this.

Business will return to normal, and the stock market will continue doing what it does – representing human progress, innovation and efficiency. And that means it will move higher.

Betting against the stock market is betting against humanity, and if you are willing to do that, then you have bigger problems than a stock market dropping.

So what am I doing?

Looking forward to expected outsized returns that will follow once the coronavirus has run its course. Over the long term, the stock market moves higher – that’s just what it does.

Which ETFs should I buy?

I have received a number of queries asking which ETFs will be good to buy during this market crash. I think you know how I am going to answer this one: you should be buying the same ETFs you would have bought if there was no market crash.

The level of the market should not be used to determine which products you buy. That is determined by your risk appetite, your views on onshore versus offshore, your time frame, goals, cost and so on.

So here’s what I’m doing …

I will continue to buy my preferred ETFs. The level of the market does not dictate what I buy.

When will we get to the bottom?

Man, I really wish I knew. But I don’t, and neither does anyone else – and don’t let anyone fool you into believing they do.

Maybe the bottom is today, maybe next week, maybe next month. You would need to be exceptionally lucky to get the exact bottom right, and chances are if you wait for the bottom you will miss it. And while you are waiting the market could be moving higher and you will miss out on that growth.

This is where buying periodically (whether that be weekly or monthly) can be your friend. Buy as you always would, then if the market moves lower, you get to buy for even cheaper, and if it moves higher then you have money invested which can benefit from that growth.

Here’s what else I’m doing …

Predicting the future is futile, so I will just continue buying month in and month out. Rand cost averaging is pretty powerful, so I will not be holding any money back and will just keep investing as I always do.

I am also ignoring any fortune-teller people forecasting where the market is going to go as well as ‘The market is going to move lower’ and ‘We are nowhere near the bottom’ type articles.

This article was first published here on the Stealthy Wealth website


Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in to comment.


Nice stats on recovery. Which index does this follow? Local or Global and which one specifically

locally things are bad as it came off a low level to start and emergeing markets always get hammered in a crisis, but this is in US equities a correction, not a “crash” It is not even near corrected yet either!

with a long view, the ratios were absurd:
total market cap : GDP was 150% which is around March 2000 levels. the normal level is more like 90%
Schiller PE ratio was around 35. the normal level is more like 15 to 17.

So taking S&P (the DOW is a price index so I ignore that) from 3390 it would be fair value closer to 2000 or less – still 20% to go. It has dropped about 25% which is hardly a crash or big drawdown. The past 11 years was an insance equity boom that was fuelled by what will eventually get classified as misguided policies driving interest rates to 0%

All investors find themselves in the following situation. Your train is stationary and you look out of the window and see the train next to you is not moving either. Then you realise that your train is moving forward slowly at first, building up speed. The next moment the train next to yours disappears from view and you can see the station building. With a shock you realise that it was the other train that moved, and not yours. You were fooled by an illusion.

The share market always recovers in nominal terms, in terms of the fiat currency. Fiat currencies can be debased. They can move on their track. So, how do we know if it is our train or the other train that is moving?

We have to look at our position relative to the station, not relative to the other train. The station is called Yellow Metal.

Yep, although not crash proof, Gold in rand terms tends to do great.

A 50 year track record of ~14% p.a speaks for itself and outstrips inflation and most equities over time.

I not necessarily advocating gold as an investment. I simply use it as a yardstick, or a unit of account, instead of the fiat currency. I price the share market in terms of ounces of gold and not in terms of the rand or the dollar. Then you get a clear picture of real growth, or the lack thereof.

There are times we should hold gold and then there are times when we should hold shares. Those who are able to determine these time periods will reap a reward of an average of 25% CAGR over a 30 year period.

If you look at the other train you never notice the station has moved 😉

That is what happened (in US equities). All the trains were equally expensive so no motion sickness anywhere. people hardly ever get out of an asset bubble early enough. I went cash a bit early (Nov), but now sitting at the airport with cash and looking at planes. Have already missed some : bookings.com was on a 1100 buy back target (from 2050), got to 1108 and now 1400. Maybe there will be cheap flights in April still…

Spare a thought for the Japanese investor who’s exchange has moved sideways for 20-30 years. Only way to make money is to sell high and buy low. But then there is by now some predictability in the market.

The dollar is insanely strong so I do not want to keep doing what I normally do.

End of comments.





Follow us:

Search Articles:Advanced Search
Click a Company: