The year 2020 will always be associated with a previously little-known Coronavirus known as COVID-19. Few economists or analysts could ever have predicted that this flu-like virus, first identified in China, would spread across the world resulting in a global pandemic. The rapid spread of this virus was the spark that triggered stock markets across the globe to crash.
A stock market crash or setback can be defined as a sudden dramatic decline in prices of shares across a broad cross-section of a stock market, resulting in a significant loss of wealth. Setbacks are driven by panic as much as by underlying economic factors. In reality, market setbacks occur far more often than is commonly believed. On average, equity markets experience a setback of 10% or more every eighteen months and a setback of 20% or more at least once every five years.
Throughout history, stock markets have been subjected to a bumpy but generally upward trajectory interspersed periodically with sometimes dramatic setbacks. The most recent major setbacks were; the sub-prime crisis in 2008 (Great Recession); the bursting of the dot-com bubble in 2001; the emerging market crisis in 1997 and the savings and loan crisis in 1987 (Black Monday).
Setbacks occur on a fairly regular basis and no two setbacks have been the same. They all however had one thing in common; the market recovered. No matter how devastating the losses were, or how long it took, the market recovered and then strengthened to a level higher than it was before the setback. How you react to a setback is key to avoid permanently eroding your wealth. A setback results in a temporary reduction of your capital, but this is a reduction on paper. The only way to convert a loss on paper into an actual loss is to sell your investments once the prices have dropped to switch into so-called safer assets. By so doing, you lock in any losses you have made and lose out on the opportunity to participate in the ultimate recovery, which historically follows every market setback.
Despite the setbacks we have experienced in the past, shares or equities have still been the best performing asset class over the long term. It is a futile exercise to try to time the market. Not even the most successful investors have been able to consistently buy at the bottom and sell at the top. Investing is inherently risky, but what makes for the successful creation of wealth is to have a sound, long-term financial plan which takes into account that there will be turbulent times along the way. If you stick to your plan, you should be able to endure the temporary downturns associated with a market setback and benefit from its eventual recovery.
No-one knows how long it will take for the market to recover from the current setback. It could be a couple of months; it could be longer and things may be uncomfortable over the short-term. An experienced Certified Financial Planner will be able to assist you to make sensible financial decisions during these turbulent times.
Rands and Sense is a monthly column, written by
Ross Marriner, a CERTIFIED FINANCIAL PLANNER® with PSG Wealth.
His Financial Planning Office number is 046 622 2891