Many investors may have experienced pain this year. The one or other portfolio may even have crashed. Nevertheless, there are some basic principles with which investors have always done well in the long run. In this little piece, I want to provide a few guidelines on how to react when stock markets crash again.
The year was very eventful from an investor perspective. In the beginning, the stock markets looked as they were ready for another record year. The indices rushed from one record high to the next. But then came the black swan in the shape of a tiny coronavirus. First, the lung disease COVID-19 rolled over mother earth. Then, governments around the world imposed a lockdown, and with the lockdown, many companies got into serious trouble. As a result of these developments, governments responded with unprecedented government aid and guarantees.
Such events pass no portfolio without leaving one or the other mark. Above all, many investors wonder what will happen if the stock markets crash again. That this can be painful is particularly true for private investors who have invested their own hard-earned money in companies. So here are some guidelines and food for your nerves.
Be aware that you are not alone
The first guideline for you is that you should remember that you are not alone with this whole mess. I know that this can be difficult, especially if you have not experienced significant crises in your life. I belong to the generation that only started investing after the Great Recession. It is also more or less the first time for me to actively experience a bear market (besides the comparatively small corrections in 2015 and 2018, which we simply ignore).
In the case of the current COVID-19 turbulences, both professionals and private investors are experiencing more or less the same thing. For the good times as well as for the bad, we are all always in the same boat. So if you think fate has been particularly hard on you, here’s a little gold nugget to cheer you up, taken from Forbes:
Therefore, when the next stock market crash comes, always remember that you will not suffer alone, but many other investors will also see book losses with you.
Ups and downs are normal
Sure, the last ten years were pretty good years for investors around the world. But it was also one of the longest bull markets. Even though much looked like it, it was clear that the party could not go on forever. And if you now believe that you have been witness to a historic and extraordinary crash, you are unfortunately mistaken:
No question, the COVID-19 crash was severe, but so far, it is not even among the top 3 in terms of total losses. The downturn of the Dow Jones in the wake of the major recession was much worse.
Of course, this is only a snapshot, and it can also go further down again. Stocks that have once lost 50 percent can lose another 50 percent. In this respect, investors could misinterpret the recent price rises and lull themselves into a false sense of security.
As always, nobody knows how the market will perform in the near future. Especially my SeekingAlpha readers know that I am against market timing and therefore my advice is: Be patient! Do not constantly look into your portfolio and enjoy your life (as far as it is possible despite the governmental lockdown). Investors such as Irving Kahn or Warren Buffett have shown that it is possible to build the foundations of future prosperity in crises or recessions.
Eventually, things will pick up again
My last point that I want to share with you in this little post is the most hopeful: In the end, the stock markets will rise again. Look at the chart, it could even be that we have already seen the bottom of the COVID-19 crash. It seems that the markets are slowly picking up again:
And that’s how it will be in the next crash. Of course, nobody knows what will happen in the short or even medium term. But in the end, when the dust settles, the stock markets will pick up again. They have always done that and will continue to do so.
So if you’re wondering what to do when the stock markets crash again, I strongly advise you to stay calm and be patient. Especially if you have not been around that long and are now sitting on your first losses, think of the stock market philosopher André Kostolany and one of his many meaningful quotes:
Stock market profits are compensation for pain and suffering. First comes the pain, then comes the money.
Maybe there will be more pain! But the stronger the pain, the greater the compensation.
All the best!
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