Are you ready for the crash?
Are you ready to see 10%… 25%… or 40% of your portfolio vanish in the proverbial puff of smoke?
Are you ready to question if you really should be investing, anyway?
If you have the stomach for this?
If your father/sister/neighbour was right when they said this stock market thing was a casino and Just. Too. Risky.?
Are you ready?
I hope so.
No, not because I think a crash is coming.
But because I know it is.
I’ve been doing this a very long time now.
I’ve invested through a lot of different markets.
I’ve lived through even more.
Though it pains me to admit it, there are a decent number of people reading this who don’t even know about Black Monday, in October 1987, when the world’s stock markets absolutely tanked.
Let me share part of the Wikipedia description of that day:
“All of the twenty-three major world markets experienced a sharp decline in October 1987. When measured in United States dollars, eight markets declined by 20 to 29%, three by 30 to 39% (Malaysia, Mexico and New Zealand), and three by more than 40% (Hong Kong, Australia and Singapore).”
Though I wasn’t an active investor that day, it’s seared into my mind.
Maybe you’re old enough to remember the dot.com crash.
Again, from Wikipedia:
“On Friday March 10, 2000, the NASDAQ Composite stock market index peaked at 5,048.62.”
“By the end of the stock market downturn of 2002, stocks had lost $5 trillion in market capitalization since the peak. At its trough on October 9, 2002, the NASDAQ-100 had dropped to 1,114, down 78% from its peak.”
No, it wasn’t the absolute vertigo-inducing one-day fall of 1987.
But the impact — over 18 confidence-sapping and portfolio-draining months — was twice as big.
Four dollars in five had evaporated.
Fast forward by the best part of a decade, to the GFC. Here’s how Wikipedia describes the impact of the Global Financial Crisis:
“By March 6, 2009 the [US Dow Jones stock market average] had dropped 54% to 6,469 from its peak of 14,164 on October 9, 2007, over a span of 17 months, before beginning to recover”
And unless you’ve been living under a rock, you’ll know the story of the COVID crash.
The S&P/ASX 200 Index (ASX: XJO) fell by 37% in just over a month, between mid-February and mid-March, including its largest single-day percentage drop since, yep, 1987.
Are you ready for a crash, yet?
I hope so.
Crashes can be brutal one-day affairs.
Or they can be drawn-out, 18-month grinding miseries.
They can feel like a sharp kick in the guts.
Or a headache that just lingers.
They sap your confidence. Your will.
And your bank balance.
A crash is a brutal, menacing mongrel of a thing.
So I hope you’re ready.
Because one is coming.
And you need to be prepared.
You need to be financially prepared: Don’t invest any money you’ll need in the next three to five years. If your $100,000 portfolio becomes $75,000, $50,000 or $40,000 overnight, you don’t want to be a forced seller.
You need to be emotionally prepared. It is going to hurt like hell. You will question yourself, and you’ll hate me. You’ll remember those doubts you had, and wish you’d taken your own advice not to get started investing. Or to sell last week, last month or last year, when you thought you should have.
You’ll want to sell everything, just to stop the pain. The pain of looking at that poor, beaten up share portfolio. The pain of even more losses in the days, weeks or months ahead.
Worse, a few of you will be forced to sell — maybe even everything — because you didn’t listen; unwisely borrowing to buy shares, and the bank will ‘call in’ the loan.
Now, are you prepared?
Because a crash is coming.
And it’s time to get prepared.
And here’s what I think you should do:
Didn’t I just say…
And then I said…
And the stories about…
Worse, there are people out there making predictions of just how soon that crash will come.
And how bad it’ll be.
And I still want you to buy?
See, investing isn’t about avoiding the crashes.
Oh, I would if I could.
If I could know when the crash was coming.
And how bad it’d be.
And how long it’d last.
Alas, I’m not blessed with such foresight. Neither, unfortunately, are you.
And those people who seem to ‘know’ a crash is coming?
They’ve ‘known’ it for years.
It just never comes.
Well, maybe not never.
But just like the broken clock that is still right twice a day, being seldom right is not only not very clever… it’s also useless.
See, here’s the thing:
That 87 crash?
The market finished 1987 higher than it started!
Says Wiki: “The [Dow Jones] gained 0.6% during calendar year 1987.”
So, if you’d been told to sell all of your shares on December 31, 1986 because a crash was coming… you’d have actually missed out on making a (small) gain.
And the market went higher after that.
The stock market is higher than the pre-dot.com peak.
Than the pre-GFC peak.
Than the pre-COVID peak.
In other words, even if those stock market Nostradamus’ had been right every one of those times (and not been wrong the other 54 times!), following their advice and selling everything would actually have cost you money.
(Oh sure, you can tell yourself you would have bought back in after each crash. But the number of really smart, sensible people who missed the post-COVID-crash recovery is astonishing. It’s easy to believe you’ll be different… but it’s bloody hard to do. And the ASX had mad back most of its losses within three months — while COVID cases were getting worse, not better.)
And I’ll tell you now: I did not forecast the COVID crash. I did not expect its suddenness or its depth. I did not pick the speed or size of the recovery.
But you know what I did?
I bought shares.
During a pandemic?
During a crash?
Am I freaking nuts?
Yes, yes and no, respectively.
Instead, I was prepared.
It wasn’t my first rodeo.
And, while I had some personal experience under my belt, I was also, in the words of Sir Isaac Newton, ‘standing on the shoulders of giants’.
I was prepared.
I knew I wouldn’t need to raid my portfolio to meet my living costs, meaning I wouldn’t be a ‘forced seller’ during a market dip.
I had girded my loins for the fact that a crash was coming. No, I didn’t know when, where, why, or how bad… I just knew that history is full of crashes, and another one was almost as certain as death and taxes.
I knew it could — would — be bad. I knew my portfolio would look sick. That I would doubt myself. That, even though I knew these things, I’d still worry.
But, like Odysseus, I (metaphorically, in my case) tied myself to the mast, lest the Sirens call me onto the rocks.
You see, both those who forecast crashes — with regular, inaccurate, monotony — and our innate desire to avoid (more) pain, are the stock market Sirens. (So, by the way, are those promising you get-rich-quick investments, but that’s another article!)
And — this is important, because you need to know the track record of those who offer you investment advice — I told our members and readers to do precisely the same.
Yes, while others panicked.
While they predicted doom, and ran around like Chicken Little.
Not because I was a better forecaster, by the way.
In fact, they very opposite.
I knew I didn’t — and couldn’t — know.
So I didn’t waste time (and money) trying to pretend to be smarter than the average bear.
I just kept investing, confident that the long term returns would justify my actions.
And I encouraged you to do the same.
And in future?
You — we — need to lash ourselves to our own investment masts.
I can’t speak for you, but I’m planning to add regularly to my investments every payday between here and retirement.
At market lows.
At market highs.
(Neither of which I’ll know at the time because you can only know those things in hindsight.)
And, if history is any guide, some self-appointed market gurus will keep making predictions of doom the whole time.
And, if history is any guide, the world’s stock markets will likely continue to rise, despite — not in the absence of — periodic crashes.
So, I hope you’re ready for the crash.
I hope that by being ready, it won’t take you by surprise, and you won’t do anything silly.
I hope that forewarned is forearmed.
And because we can’t know when it’ll come, how bad it’ll be and — perhaps more importantly — how far the market will rise before any crash arrives, I hope you won’t let predictions of doom scare you away.
I hope you’ll invest — regularly — anyway.