This article starts with an uncomfortable but unavoidable truth: At some stage in the future, there will be a market crash.
Indeed, when it comes to the possibility of turmoil in financial markets, it really is a case of “when”, not “if”.
Discover why we can be so confident about making that assumption, and why you should have a clear idea in your own mind of your “lifeboat drill” and how you plan to react to it when it occurs.
Investors are currently enjoying strong growth
A “bull market” is a financial market where stock values rise over an extended period of time. According to JP Morgan, such markets last, on average, for almost four years.
They also state that the current rally has only lasted 21 months and, at the end of June 2024, had only delivered a total market return of 50%, compared to an average historical bull market return of 110%.
While past performance does not necessarily indicate future performance, this means that, by the law of averages, there may still be plenty of life in this current period of market growth that you’re enjoying.
The regular reviews we have with clients are showing that their investment portfolios are indeed delivering healthy returns and that the investments we manage are in line with, and in some instances, beating our chosen benchmarks.
It’s close to impossible to predict when a bear market will start
If a market declines in excess of 20%, it is described as a “bear market”. A report by Forbes in 2022 revealed that, since the founding of the S&P 500 index in 1957, bear markets have occurred on average every five-and-a-half years.
Furthermore, Hartford confirms that the average loss of stock values in such a market is 35%.
While a lot of articles and studies are produced regarding bear markets, there is no certain way of knowing when a bear market will occur, how precipitous it will be, or how long it will last.
We also don’t know what will cause the next bear market. After all, Investopedia confirms that the last three serious bear markets happened as a result of wildly varying factors:
- A worldwide pandemic
- The subprime mortgage lending crisis in the US
- Overinflated tech stock values.
A lot of people were wise after the event in the aftermath of the financial crash in 2008, but only a tiny number of people can say they actually predicted it.
That won’t deter many self-styled investment “experts” from predicting the next financial crash and confidently telling you what the causes will be and when it’s likely to begin.
To my mind, most of their predictions are simply driven by a wishful desire to be proved right so they can then claim their superior intellect and wisdom, rather than through any learned insight.
The best time to go through a lifeboat drill is before you need it
You probably won’t have heard of Nick Murray. But to many financial planners, including me, he is a constant source of wisdom, to the extent that he is often referred to as the “advisers’ adviser”.
I often refer to his website and newsletters for insight into how to think about key advice issues such as the client-adviser relationship, and how to help clients react appropriately to certain external events.
One such valuable piece of advice I’ve picked up from him can be simply summed up in terms of the best time to carry out a lifeboat drill – that is, it should be done when the ship is in calm waters, rather than as it’s approaching an iceberg.
In fact, that advice applies to any kind of emergency drill. It’s why you watch the emergency procedure demonstration on a flight before you take off, rather than at 36,000 feet, and why offices and schools regularly practise evacuations for fires and other emergencies.
Doing this means that you know what to do when faced with an unexpected and cataclysmic event, helping avoid unnecessary panic and irrational reactions.
As it is for planes and ocean-going liners, so it should be for you and your investments.
Your own personal emergency investment drill
So, what should your emergency drill entail in the event of a bear market?
Probably the most important thing to do is what you should do in the event of any emergency or big upheaval, and that’s to not panic.
I appreciate that this could run contrary to your natural human reaction. After all, when fear and panic set in, it can be difficult to act rationally, and it’s easy to make mistakes. This is especially the case as you are likely to see the value of your invested assets falling in value precipitously on a daily basis.
But probably the worst thing to do is join in the panic and sell assets for less than you acquired them and for less than they will become as part of your-term plan.
The second part of your drill is to remember that successful investing requires staying in the market for an extended period, and to appreciate that markets do go through periods of turmoil.
And the final point is to see any sudden market fall as a “correction”. During a bull market, many stocks can become over-valued as investors start to ignore market fundamentals and buy on emotion rather than any more serious due diligence. So much of a downturn will be the market correcting itself as values fall to a more realistic and accurate price.
Bear markets can present investing opportunities
In the same way that stocks can become over-valued in a bull market, they can just as easily become under-valued when markets have corrected.
Unless a market correction is specifically related to a certain sector or geographic region, it’s likely that all stocks will be affected by the sell-off prompted by the early signs of market turmoil.
This means that, once the market has bottomed out, you are likely to be faced with an excellent buying opportunity as many quality stocks will be under-priced. Of course, no one knows when the bottom will be reached either!
Get in touch
We work with our existing clients to ensure that in the event of a market downturn, you still have an emergency fund on hand and have enough liquidity to provide income in the short term without having to sell assets at a loss.
If you have any queries regarding your own investment strategy, please get in touch. You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
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