Don’t fear the stock market crash.
This is your chance to invest at bargain prices
People react to a crisis in different ways. Some run in shock, while others charge into the heat of the battle.
It’s the ancient ‘fight or flight’ physiological response to danger, and investors aren’t immune to it, quite the reverse.
When stock markets crash, as they have done due to the coronavirus, investors face competing impulses. Should they sell up and flee the market, or stand their ground and invest more?
I am firmly in the latter camp. I'm not selling shares right now, I’m fighting back against the crash by buying them instead. History shows that in a bear market like this one, there are fortunes to be made as well as lost.
The first emotion you have to control is panic. This is not the time to cut and run by selling existing shares or funds, as that will only turn paper losses into the real thing. Also, you will miss out on the recovery, when it comes. Share prices can register sharp jumps even during a bear market, which hurts if you have just sold up. Instead, you have to remind yourself why you invested in the first place. In the majority of cases, that will be to build long-term wealth, primarily for retirement. You have to look beyond short-term shocks like the current one, because they will pass and stock markets will recover, as they have always done in the past.
So stick it out.
Next, get a grip, and start investing if you have money to spare. With global stock markets down by around a quarter, there are bargains to be had.
Shares are on sale
Too many people focus on the dangers of losing money when shares fall, but a crash is a fantastic opportunity for long-term investors to boost their wealth by picking up stocks at reduced prices. If you can summon up the courage to buy shares today, whether as direct equities or index-tracking exchange traded funds (ETFs), you could turbocharge your plans to get rich and retire early. It isn't easy though. When fear takes hold, even experienced investors struggle to dive into the market at a time when others are racing for the exits. That is especially true as the Covid-19 pandemic drags us all into unknown territory. We have no idea how long the outbreak will last, whether it will recur and how much damage it will cause.
Time to get greedy
To stiffen your resolve, I will remind you of what is probably the most famous investment quote ever, by the world's most successful investor, US billionaire Warren Buffett, who said: “The time to be fearful is when others are greedy, and greedy when others are fearful.”
That quote is tailor-made for today, as well as every other stock market crash in history. Of course, some will have a valid reason to be fearful. If your job is threatened right now, this is not the time to take undue risks. However, if you are investing for the long-term, this could prove the perfect time to get greedy and buy shares, provided you do it sensibly. Only invest money you do not expect to need for at least five years, and ideally much longer. That way, you can afford to overlook short-term volatility. Try to imagine what the coronavirus market meltdown will look like in 20 or 30 years. With luck, it will be a blip, but the stock market will be higher and you will be richer, because you took bold action today.
Learn from history
If still struggling to work up the courage to invest, try reading up on a bit of stock market history. Whisper it, but stock markets crash. It's what they do. Before today, the biggest three crashes of my life were Black Monday in 1987, the technology crash in 2000, and the financial crisis in 2008. There have been plenty of other bear markets in between, many of which you will have forgotten about.
Remember the share price rout in January 2016, after the Chinese stock market sold off?
I do, but only just.
Or the 2018 global stock market meltdown, when the S&P 500 fell 20% in the months before Christmas Eve?
I wrote copiously about that, but even I had to turn to Wikipedia to remind me.
What about the stock market sell-off in 2015? Or the 2011 eurozone panic? The 2010 flash crash?
I bet you don't remember them but that's fine, the only thing you need to know is that share prices fell for whatever reason, only to hit new heights afterwards. The greedy finished up richer, the fearful ones ended up kicking themselves.
Time to fight back
The Covid-19 bear market is impossible to predict. We have never been here before. The market could fall further, and take years to recapture its recent highs. On the other hand, if an effective treatment is found, we might enjoy the biggest V-shaped recovery in history.
Despite the uncertainty, I would still invest today. You will never get your timing exactly right, by investing at the very bottom of the market. The key is to start building up your position and generating dividends, so you are nicely placed when markets do rally. Where you invest is up to you. Many will shun stricken sectors such as airlines, cruise operators, cinema chains, hotels and so on, as the road to recovery could be long. Tech companies, healthcare stocks and utilities have held up during the crash, proving their worth.
Alternatively, you may wish to plug gaps in your portfolio, by taking out ETFs tracking indices where you may be underexposed, such as emerging markets.
It's up to you.
The most important thing is to resist the urge towards flight, and show some fight.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.