The purpose of this page it to give some calming advice during the next pronounced bear market. Not for a relatively small 10-20% pull back but a proper 'it's the end of the world' 40-50% or even more 'catastrophy'. The last crisis in 2008-2009 promised a world wide depression and cracking of the financial system, I can only imagine something similar is being predicted now, perhaps hyper inflation is finally being played out or a even a dollar/euro crisis.
Anyhow, whatever the cause the markets are in a deep dive, the news feeds are continuously pumping out 'this is the end' scenarios and panic is setting in. This is not to say that all of the predictions will turn out to wrong and life will become wonderful but no one knows what the future holds. The temptation, as always, will be to extrapolate the near past into the future.
However, history has shown us that markets typically over react on the upside with exuberance and also on the downside with fear. This will bring opportunity especially if there are forced sellers. However, do not underestimate how difficult it will be to go against herd and buy when everyone else is rushing for the exits.
Timing it right for the inevitable correction will be nearly impossible, Buffett was 'buying US stocks' in Oct 2008 and the S&P500 fell another 45%! People thought he'd gone mad. The bottom line was he saw value and knew time would eventually prove him to be right.
If you have a diversified portfolio of stock and bond funds then keep on adding to it with your monthly savings, if you can. Most likely it will feel like money down the drain. However, the fact is it is now, when prices drop and you can buy more for your money, that will add to your future returns as you are buying when prices are cheaper.
Ideally you should not change your asset allocation purely because of recent events, however if you are now realising it was set wrongly and cannot tolerate the volatility, change it modestly, perhaps 10-20% at first.
If you have individual stocks then one strategy is to rigorously stick to a moving stop loss exit. For example, if prices hit your predetermined 35% stop loss, then you sell the shares, no regrets no second thoughts. This might be the best approach if you have bought near the top.
If however, you fully understand the business behind the stocks you own and really believe in 5-10 years time they will recover then keep them. The test question though is this, would you buy more at these lower prices? If they are still worth keeping at the higher prices you bought them at then surely they must be extremely good value now or?!
If you are fortunate to have spare cash then at some point it will be time to deploy it. This will be a challenge, you will want to keep it for safety to weather the crisis. There will be no guarantees, your timing will be off, perhaps markets will take years to recover and you will need the money sooner rather than later.
But that is the nature of the beast. When fear and uncertainty is at its highest then that is when you will get rewarded the most. Let's be honest here, if the world and modern civilisation does end then your online portfolio that you access on your (now worthless) computer using wi-fi (that no longer exists!) will be the least of your worries!
As a reference and a bit of inspiration here is an article from the New York Times on how Howard Marks and Oaktree Capital played the last financial crisis.
"The week of Lehman's demise, Mr Karsh huddled with his team. As the financial world unraveled, Oaktree found itself deep in the red. But Mr Karsh had been investing in distressed debt for over two decades, and had never seen bargains like the ones flashing across his Bloomberg terminal. Senior bank loans - the ones first in line to be paid in bankruptcy - were trading at lows of 60 cents on the dollar and offering yields of about 30%. "Either this is the greatest buying opportunity of my career or the world is going to end," Mr. Karsh told his staff. "And if it ends, our clients will have much bigger problems on their hands.""
You will also find this timeless advice useful from the book Where Are the Customers’ Yachts: or A Good Hard Look at Wall Street? by Fred Schwed, Jr. Soon it will be your chance to buy.
“For no fee at all I am prepared to offer to any wealthy person an investment program which will last a lifetime and will not only preserve the estate but greatly increase it. Like other great ideas, this one is simple:
When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this—just wait for the depression which will come sooner or later.
When this depression—or panic—becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you will have the pleasure of dying rich.
A glance at financial history will show that there never was a generation for whom this advice would not have worked splendidly. But it distresses me to report that I have never enjoyed the social acquaintance of anyone who managed to do it. It looks as easy as rolling off a log, but it isn’t. The chief difficulties, of course, are psychological.
It requires buying bonds when bonds are generally unpopular, and buying stocks when stocks are universally detested.
I suspect that there are actually a few people who do something like this, even though I have never had the pleasure of meeting them. I suspect it because someone must buy the stock that the suckers sell at those awful prices—a fact usually outside the consciousness of the public and of financial reporters.
An experienced reporter’s poetic account in the paper following a day of terrible panic reads this way:
Large selling was in evidence at the opening bell and gained steadily in volume and violence throughout the morning session. At noon a rally, dishearteningly brief, took place as a result of short covering. But a new selling wave soon threw the market into utter chaos, and during the final hour equities were thrown overboard in huge lots, without regard for price or value.
The public reads the papers, and reading the foregoing, it gets the impression that on that catastrophic day everyone sold and nobody bought, except that little band of shorts (who most likely didn’t exist). Of course, there is just no truth in that at all. If on that day the terrific “selling” amounted to seven million, three hundred and sixty-five thousand shares, the volume of the buying can also be calculated. In this case it was 7,365,000 shares.”
Well written !
SvaraRadera