A share market is a unique place. It can be rather joyous when the shares you’ve just bought start skyrocketing. But sadly, when the same shares suddenly drop out of ‘sight’, it can cause some rather severe grief as well! Here are some thoughts to keep in mind when the latter happens.
Now I am not sure how many of you are familiar with “Quora”? But if you’re not, it is quite simply a question and answer site. Anyone can submit a question and whoever wants to, can answer it.
There is absolutely no limit to the type of question that can be asked, ranging across literally every topic imaginable. And those choosing to provide answers also range from extremely well-credentialed subject experts, through to literally anyone who takes an interest.
As a result, readers of the site are treated to an amazing array of personal insights, wrapped up in a very intellectually stimulating package. A great place and one I can certainly recommend spending some time on.
Anyway, I currently answer questions on the site, and it was indeed from a question posed on ‘Quora’ that led me to write this post. As you can probably guess, the topics I provide answers too are all related to investing.
But amongst the ‘what’s the best share’, and ‘how do I become rich’ types of questions, there are some which strike me as being somewhat odd. Now, I am certainly not suggesting ‘odd’ in any derogatory way, but rather being ‘odd’ in a puzzling sought of way.
Here’s a case in point,
‘Do you think the stock market will ever crash in the coming years?’
Now you’re probably thinking, what’s so odd about asking that? Sure, it appears to be a reasonable request, just someone asking to supply a viewpoint of future market volatility. And it’s not as if they’re asking for specific dates, merely inquiring about the possibility, of a future event. So all in all, it seems rather straightforward.
But, for me, this question screams out something much more than inquiring about market falls. It’s actually telling me that there is someone; quite willing to invest their hard earned money, but who has absolutely no idea of what they are getting into.
Now, semantics, ESL, bad grammar et al, aside, it’s obvious that this question quite clearly has its origins in whether the stock market will ever crash in the future.
And the answer is simple – of course it’s going to crash. Market cycles are the very essence of investing. And as with all cycles, they go up and they go down. They ebb and wane, they skyrocket and they crash. Call it what you will, it is just what happens. It’s the one and only, gilt-edged, blue ribboned, guaranteed part of investing.
Therefore, it is a question that doesn’t actually need to be asked. And if it does get asked, the asker really needs to revisit the reasons for their investment, because they are in for quite a shock at some future date.
But don’t think for a minute that it’s just the inexperienced asking these questions. I vividly recall once being in a meeting during the 2000 ‘tech wreck’. An “experienced” adviser, commenting his concern about the severe market falls, actually said “they didn’t tell us in training that the market could go down”, And, ladies and gentleman that person continues to this day, guiding people and their investments!
I have also, during my time, heard other ‘well trained’ advisers suggest, “Share markets never fall more than 10%” and “The Australian market is never as volatile as US markets’. And how about this one, directly from an economics teacher of 30 years “Yes, property markets do fall, but Sydney’s property prices just level off” Mmm, some good advice, not!
So for anyone entering into an investment, at the very least you should be aware that at any time, the value of the investment can tumble. In fact, back during my adviser day’s, I would actually give my clients a guarantee. Firstly, that the recommended market-linked investments would lose money in the short term! And secondly, I also guaranteed that over the long term, they would certainly make money.
But as a result of the current 10-year bull run, many people are deluded into thinking, “what can go wrong” This is particularly relevant to both young investors who would have no recollection of any ‘bears’ and new investors entering markets purely as a result of crowd behavior.
Unfortunately, when share markets fall, they fuel investors with some pretty strong emotions, fear, being the primary one. And if the severity of the fall, is suddenly a surprise to an investor, fear will manifest into ” flight”, and they sell-out. Suddenly, all those wonderful thoughts of building long-
term investment portfolios dreamed up in more optimistic times, suddenly turn into real nightmares!
Here’s just two links reporting the big outflows from US funds during February, a time of intense volatility.
https://www.cnbc.com/2018/02/09/us-stock-funds-suffer-record-outflows-of-23-point-9- billion.html
Investors always run for the exits when markets go down. Whether that is a good or a bad thing is a topic for another post. But it does indicate that often the long “termism” so often talked about by new investors, can suddenly be thrown out the window, as soon as markets turn rough!
But here’s the thing. Any investor who has created their investment plan to include market down- turns will also have had the opportunity to develop strategies to overcome and capitalize on them. And this is what makes money.
Severe market falls are the prime hunting grounds of the true value investor.
Now, I’m certainly not one to speak in excited tones about all the marvelous buying opportunities made available during bear markets. Why, because I hate bear markets; they reduce my net assets. However, I am the sort of person that will accept that they occur and continue my investment pro- gram accordingly. I am ready for them and view any major downturn as just the current prevailing conditions. Which I definitely know at some point in the future, will reverse. Therefore I need to take real advantage of the conditions.
So if you are really adopting a long-term approach to your investing, it is important to accept and address market volatility. Which can mean many months or even years of negative or at the best, sideways performance? And selling out during this time is not only absolutely stupid but will cost you dearly in the long run.
Here are some pointers to act as guidance
Your investments will go down. That is guaranteed. Just get used to it.
Don’t sell out, no matter how dreadful it appears. (I can guarantee you, it will feel pretty dreadful.)
Plan your actions for a downturn in advance, not during the downturn. Commit these actions into writing, and act on them when the events occur. Believe in your plan. A well researched and thought out plan always works.
And remember, long-term investing should always be done with funds not required for any other household or personal reason. They must be solely for the purpose of investment. This will ensure that when investment values do fall, it will have absolutely no effect whatsoever on you or your families lifestyle.
Thanks for reading, see you next time. Homepage
By the way, here’s a link to my Quora page. When you get there just scroll down to find the par- ticular question. Last count 6,800 people had read it!
