Apologies for the break in schedule last week, there’s been a lot going on around here! Let’s dive right back in though and discuss an investment scenario that all of us will face sooner or later: what’s the right approach when things get really bad? What do you do when there’s a global pandemic and the stock market keeps going lower?
Intuition would suggest you should sit out of the market and wait it out, but as always, it’s not that straightforward…
At the risk of sounding clichéd, there are two sentiments that drive the market: greed and fear. When things are good, they’re fantastic, and when things are bad, it can seem like the world is ending.
It’s important to remember these sentiments when you’re trying to make sense of market moves. The stock market isn’t a static thing - it’s comprised of hundreds of individual companies whose futures are all tied to a wide variety of factors, from climate to consumption trends to regulation.
Very rarely do we see an event (good or bad) that affects all companies in the market at once. When such an event does occur, individuals don’t always make rational decisions about their portfolios. Greed and fear take over, and the market starts doing some funky things.
So, given that we’re in one of those rare dislocations, how should you approach investing?
Selling
Global markets had their worst month since 2008 this past March. Watching the value of your portfolio drop by 20-30% in a matter of days can be gut-wrenching and you might think to yourself: should I just cut my losses and sell?
First off, this is an incredibly personal decision and the answer may not be the same for any two people, or even for the same person at different stages in their life. However, before you decide to sell, there are a couple of things worth considering:
Is the investment still viable? Take a deep breath and ask yourself if the company or fund you’re considering selling is still going to be in good shape once the initial fallout from this event passes. For example, you might have panicked and sold your Amazon or Facebook shares when everything was crashing in March. If you think back however, you could’ve probably predicted that Instagram was going to be fine and all the noise (fear) was just temporary.
There are of course other industries such as travel or construction where the outlook might be less clear-cut, which brings us to our second point…
Is the dislocation going to last? How long are you willing to hold on to see if things will recover? If you feel as though the company’s sales will be in the dumps for an extended period (years not months), then selling might make sense. Even then, deciding WHEN to sell is key, because you want to avoid selling at the absolute lows when fear is driving the market. The best case scenario obviously is coming to a decision early and at the first signs of trouble. If you miss that window, then you’re better off waiting a few weeks until things stabilize and prices recover a bit.
Unfortunately, there’s never a “perfect” time to sell… but if you’ve made up your mind and feel like the company’s best days are in the past, selling sooner rather than later is probably the best approach.
Buying
Buying when the market is spilling its guts can be as scary as selling. You could find yourself in a scenario where you bite the bullet and buy some shares only to see your position suddenly drop 10% the next day, as more bad news continues to hit the headlines. If that happens, it’s incredibly tough to stay committed and keep buying more.
Just like with selling, try to take a step back here and ignore the fear. Again, ask yourself a couple of questions:
Is this dislocation temporary? If yes, then it could be a great time to buy. Forget about individual stocks, the market-wide 30% drop earlier this year was the first of its kind in a decade. Unless you think the world is going to end and things will never get better, that kind of drop usually represents a once-in-a-lifetime chance to buy quality ETFs and stocks at a discount. The U.S. market is now +50% since its lows in March! Whether or not that recovery is overblown is a discussion for another day, but our point is that (most) situations do eventually get better no matter how bleak they might seem at first.
Are you trying to bet rather than invest? Big downward moves are tempting times to try and make a quick buck, especially if you’re confident things will recover sooner or later. Now, there’s absolutely nothing wrong with a punt, but you want to avoid putting $$ in stocks or products you don’t know much about. Many investors were burned when American car-rental firm Hertz sold new shares in June despite being bankrupt, a classic example of greed taking precedence over logic.
There’s really no perfect time to buy, either. In fact it’s nearly impossible to time a purchase at the absolute market lows but that shouldn’t dissuade you from still putting your money in. Once the noise fades and people find a way to tackle the bad news, most companies should snap right back to the same trajectory as before the dislocating event.
Investing your personal savings is an emotional process even at the best of times. Global upheavals such as the 2008 financial crisis or Covid-19 make it all the more difficult - it’s pretty terrifying to watch your savings shrink overnight…
However, if you’re able to separate some of the emotion and think more long-term, these events can be a great opportunity to invest in solid companies at bargain prices.
On the flipside, if you own companies you’ve lost faith in, why wait until everything is blowing up to sell?
Greed and fear can make people do funny things. Hopefully, over time and with more experience, you’ll learn to remove those elements from the investment process and be better prepared the next time something crazy rolls around.
Note, these posts are intended as an educational resource and to encourage participation in the stock market. None of our opinions should be taken as investment advice, please speak to a professional for that :)
Very well written
How I wish you had started this blog 6 months ago 😔