Every time there is a stock market crash, investors flee and never ever return. Why?
Before I get into the reasons, let’s take a step back and look at the history of stock market crashes. Here is a list of the most recent and most memorable crashes in the global stock markets.
February/March 2020 – Covid
September 2008 – Financial crisis
March 2020 – Dot Com bubble
September 1992 – Black Wednesday
October 1987 – Black Monday
There have been other market corrections over the years, however, these are probably the most remembered.
Investors, often start to invest when they see a rise in asset values. We are currently seeing exactly this in Cryptocurrencies. It is not dissimilar to Tulip mania now. Often the new and inexperienced investors are just jumping on the bandwagon and are frightened that they are missing out on the next big thing. But here is the problem with that strategy.
No. 1 – By the time the new investors are aware of the markets increasing rapidly, it’s too late. They have missed a huge part of the rise in the value. The values are already becoming unstable and unjustified at this point in the cycle.
No. 2. – They are investing for investing’s sake. There is no future plan, there is no actual strategy, other than I must get on this train before it departs. Investing for no reason is never a great idea.
No 3. – There is a mistaken belief that investment values, will continuously head north and cannot possibly fall. Believing this is a fool’s errand. Eventually, the value of all assets becomes overpriced, and the value must come back to a sensible valuation.
These types of investors take flight as soon as there is a correction in the market and most never ever return. Many of them believe that investing in stocks and shares is impossible and you cannot make money.
Nothing could be further from the truth.
Some of the world’s leading stock markets have achieved an average return of over 10% a year over the last 30 years.
So, the question is this. Not if, but when the stock market crashes, how are you going to deal with the emotional impact? I am an experienced investor and have been investing for more than 35 years. I can tell you, that when the markets fall, I do not like it. The only difference is that I expect it to happen and have learned to take it in my stride.
Here are my top 5 tips on how to be a world-class investor.
- It’s important to understand how much investment risk you can emotionally deal with. For some investors, if the value fell by 10%, they would not be able to sleep at night. For others, the value could fall by 30% and they would still be ok.
- Understand how much you can afford the values to fall by, before it starts to have an impact on you financially. You may be a higher risk investor, but you may not have the capacity to withstand a fall of any substance in the value. For example, if your income was dependent upon the investment, a big fall could jeopardise your future income.
- It’s also important to understand that stock markets are not a short-term strategy. I have been an investor for over 35 years. My strategy has always been ultra-long term. I do not need the income from my investments yet, so my strategy is for long term capital growth.
- It is also very important to make sure that you invest in a diverse range of investments. I often see investors for the first time that are either invested in only 1 fund or exclusively in one sector or area. This only serves to concentrate the risk.
- Finally, never chase the new shiny penny with any significant amount of money. Your core investments should be in tried and tested strategies that you know will work in the long term. By all means invest in the latest trend but keep your investment amount to a sensible amount.
In summary, avoid jumping on the latest trend and always invest for the long term. There is rarely any short easy win when it comes to investing. And finally, avoid people claiming to be able to time the market. As the greatest investor in history, Warren Buffett said, it’s not ‘timing’ the market, it’s ‘time in’ the market.
If you can put the right financial plans and investments in place, how much will this help you going forward?
I going to leave it there. I’d love to have a conversation with you about how your investment planning program if we can help you and your family.
All you need to do is book a call with us, to help you understand what options are open to you. Click on the link below to schedule a call with us.
As with any investment, there is no guarantee that the target return will be achieved, and investors may get back less than the amount they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on individual circumstances and is subject to change.