Coronavirus Crash: What History Can Tell Investors About Stock Market Falls

To all our clients, we hope you are all well and healthy.

These are strange days indeed for all of us and we still cannot get used to not wearing a suit for work! Most investors are seemingly taking everything in their stride as even more fundamental important matters such as staying healthy and looking after loved ones take precedence. For less stoical investors, I came across an interesting article recently (summarised below in italics) which adds some perspective to what is happening to stockmarkets of late and the power of them to recover given time:-

‘Buy low and sell high. It’s pretty simple. The problem is knowing what’s low and what’s high’.  These words, from legendary American investor Jim Rogers, reflect the conundrum facing millions of investors as the coronavirus crisis ravages the world’s investment markets. When share and fund prices are undulating in front of your eyes it can be tempting to simply sell up and run for the hills. No one can know for certain whether during this virus-led crash that cashing in might be the right or wrong thing to do. Would it be better to stay put and ride it out – or even add to your investments because prices are cheaper? Possibly the best course of action is not to make any rash decisions. You probably know the warning that past performance is no guarantee (and not even a reliable indicator) of future performance. But it is interesting to look back at stock market history to see how investors reacted.

Lesson 1: Don’t Panic

Another renowned American investor Warren Buffett, once said about the Dow Jones Industrial Average index of US shares: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497 [at the end of 1999].” More recent history has shown similar recoveries after crashes – though some have been more like a steady crawl uphill than a bounce. No one knows what will happen from here but there are lessons we can learn from what’s gone before.

1987 Crash

The FTSE 100 Index had been roaring away when in October 1987 it all suddenly came tumbling down. Worries about a global recession and rising inflation started a panic. It was made worse by computerised trading that failed to cope with resulting large volumes of share trades. Looking at share prices alone it took 21 months for the FTSE to return to the pre-crash levels. But adding in dividends paid to investors would have revealed that the index recovered much faster. However, the FTSE data is not available for this – although it is for later years.

1999-2000 Technology Crash

The overhyped dot.com industry fuelled a dramatic rise in share prices by the end of 1999. But by 2000 it became clear many of the tech firms’ financial forecasts were built on sand – so panic selling ensued. The FTSE, also knocked by events such as 9/11, declined to a low in March 2003 and took about three years to return to its pre-crash peak.

2007-2008 Financial Crisis

The FTSE was in robust health in the autumn of 2007 fuelled partly by financial deregulation, which had led to a boom in easy credit. But following a housing market crash in the US the riskiest loans turned bad. American investment bank Lehman’s went bust in September 2008, triggering a house of cards effect threatening the future of banks all over the globe. There were several shocks to hit the FTSE, which tumbled dramatically by March 2009. The index, including the reinvestment of dividends, climbed back to pre-crisis levels in about 21 months.

Lesson 2: Sit Tight – Investing Is For The Long Term

Pete Brooks, Barclays Head of Behavioural Investment, said: “Investors look for their money to have grown by the time they need it for something other than investing – so the ups and downs along the way are a test of your mettle rather than the soundness of your investment strategy. Recall why are you investing and stay focused on the end point.”

Lesson 3: Alternatives – There Is Not Much Competition For Your Money

If you are not investing in shares or funds, where will you put your money? Cash is the safest place as it is guaranteed not to fall in value (other than being eaten away by inflation, which also affects share values). Hopefully, you already have a decent proportion of your pot in cash for rainy days.

With adequate savings in cash you’ll be able to sleep soundly. But when interest rates fall so does income from savings – unless you have a fixed rate deal. Falling interest rates have a similar effect on the yields paid on bonds, which is an issue for income seekers. But at the same time bond values rise, which favours capital investors. Gold, a favourite safe haven in turbulent times, does not always look too shiny – and it pays no income.

Lesson 4: When To Buy – Don’t Try To Time The Market

A crash can offer you the chance to buy investments more cheaply than before. Experts look at loads of data and information to try and gauge when we will or whether we have already hit the bottom. But you can never be certain so it’s the sort of thing that can only be called retrospectively.

If you want to keep investing in the stock market, then think about regular investing. Less of your money is at risk from a sharp fall – and if the market dips you end up buying more for your money the following month. But remember prices might rise making your future purchases more expensive and your return therefore less. But overall, regular investing removes the pain of deciding exactly when to buy.

Pete Brooks said: “Regular investing can be a really effective way of managing the emotional strain of trying to pick the best moment to invest. It may or may not work in your favour if you look only at returns, but if it helps you get invested, when you otherwise wouldn’t, that could have the biggest effect on what you can achieve with your money.”

Lesson 5: Check Your Investments And Do Your Homework.

Check that you do not have all your eggs in one investment basket. That doesn’t just mean spreading your pot between cash, bonds and shares but also within sectors. The lesson of the technology crash was many people got carried away with one fashionable sector without doing their homework. The same can be said of investing too much in one particular market, such as keeping all your money in UK shares when there are other global markets to consider.

Lesson 6: The Potential Power Of Compounding

The FTSE numbers you read each day simply show how share prices are performing but ignore dividends. Many of the firms that make up the index have paid shareholders dividends – a share of the profits they make. By reinvesting any dividends your money has the potential to grow more over time. But dividends depend on profits being made and when economic crisis strikes, it can affect the profits of many companies.

 

Fascinating as it is to look back at past stock market crashes and their aftermath, we have no way of knowing what will happen this time round. The FTSE lost 35% within a few weeks at the outbreak of the pandemic but has recovered around 14% since. However, with the oil price slumping as demand falls away this provides a further threat to recent relative valuation stability.

Whatever your thoughts are presently about your investments, we can advise you that Warr & Co. Independent Financial Advisers Limited is open for business (although this may look a little different to you) and feel free therefore to contact us with any queries or comments that you may have. Please always take independent financial advice before making investment decisions.

Keep well and stay safe.