”Surely we are due a crash soon?” asks just about everyone I meet with.
That's a question that is impossible for me – or anyone - to answer.
After all, it’s the 10 year anniversary of the Global Financial Crisis but since then, apart from some minor corrections, the market has continued to recover and is now at its highest peak ever.
The markets have been so stable for so long now, that anyone who started investing in the last 10 years has yet to weather a perfect market storm.
Even if you have, you may have forgotten how panic-inducing those times can be.
This worries me.
Experience and evidence alike show us how severely bear markets test investor resolve, sabotage otherwise solid plans, and just plain hurt.
We’ve also seen how damaging it can be to act on rash fear rather than rational resolve during market downturns.
The market is going to tank again at some stage. We just don't know when.
All we do know that when it does happen - and it will - the only thing we can control is our response.
So let’s pretend, shall we?
Just as we prepare for other emergencies, here are 8 practical steps you can take when financial markets are tanking … and, to be honest, even when they’re not.
1. Don’t panic (or pretend not to)
It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid indulging in it during a crisis. If you’re entertaining seemingly logical excuses to bail out during a steep or sustained market downturn, remember: It’s highly likely your behavioural biases are doing the talking. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.
2. Remember the evidence.
One way to ignore your self-doubts during market crises is to heed what decades of practical and academic evidence have taught us about investing: Capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than come out ahead.
3. Manage your exposure to breaking news.
There’s a difference between following current events versus fixating on them. In today’s non-stop media world, it’s easier than ever to be inundated by news. When you become mired in the minutiae, it’s hard to retain your long-term perspective. Step away from the screens.
4. Revisit your carefully crafted investment plans (or make some).
Even if you yearn to go by gut feel during a financial crisis, remember: You promised yourself you wouldn’t do that. When did you promise? When you planned your personalised investment portfolio, carefully allocated to various sources of expected returns, globally diversified to dampen the risks involved, and sensibly executed with low-cost funds managed in an evidence-based manner. What if you’ve not yet made these sorts of plans or established this kind of portfolio? Then these are actions we encourage you to take now if you haven’t already done so.
“The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out plan (if they have one) until they reach their destination. And if they don’t have a plan, write one immediately." Larry Swedroe, financial author
5. Reconsider your risk tolerance (but don’t act on it just yet).
When you craft a personalised investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns and your advisor should have talked you through this. Unfortunately, during quiet times, it’s easy to overestimate how much risk you can stomach.
If you discover you’re miserable to the point of breaking during even modest market declines, you may need to re-think your investment plans. Start planning for prudent portfolio adjustments, preferably working with an objective advisor to help you implement them judiciously over time.
Re-read my article on how we process risk.
6. Double down on your risk exposure – if you’re able.
Warning: This is not for the timid!
If you have nerves of steel, market downturns can be opportunities to buy more of the depressed (low-price) funds that fit into your long-range investment plan. You can do this with new money, or by rebalancing what you’ve got. But if you’re able to do this and hold tight, you’re especially well-positioned to make the most of the expected recovery.
7. Revisit this article.
There is no better time to re-read this article than when today’s “safety drill” is no longer an exercise but a real event. Maybe it will take your mind off the barrage of breaking news!
8. Talk to me
We don’t know when. We don’t know how severe it will be, or how long it will last. But sooner or later, we expect the markets will tank again for a while, just as we also expect they’ll eventually recover and continue upward. The mantra is: We believe in the markets.
Rather than working through this financial crisis alone, you might benefit from working with a financial advisor to help you through these dark days and stop you from making any emotionally charged decisions. They can help protect you from your worst enemy during this time - yourself!