‘Stock Market Crash’ are three words that strike fear in every investor’s heart. Aside from setting your defensive mode in action, have you ever considered that crashes are actually part and parcel of the investing cycle, and that there is always a ‘silver lining’ in market downturns?
First, let’s look at what many consider to be the worst market crash in history: The Black Monday crash of 1987. On Monday, 19 October 1987, the Dow Jones Industrial Average plunged by nearly 22%. Black Monday, as the day is now known, marks the biggest single-day decline in stock market history.1
So now the question would be: How long did it take for the market to recover after Black Monday?
As swiftly as it struck, Black Monday didn’t last that long. With the help of central banks who cut interest rates, financial markets in the US and Europe fully recovered. In fact, five years later, markets were rising by about 15% a year.2
You might ask: If the market looks like it is heading towards a crash, should I sell all my stocks and buy them back when the market stabilises? In theory, the market timing strategy might sound easy to pull off. But in reality, it is extremely difficult to execute because you need to get the timing exactly right on two crucial decisions – selling, and then buying back.
By selling too early, you run the risk of leaving money on the table. As for the process of buying back, there are bound to be many external factors such as negative news headlines which may cause you to second-guess yourself. As a result, you might have taken too long to get back into the market, losing out on good earning opportunities.
Remember that you have a plan; the long-term kind. Depending on your financial situation and risk tolerance, it can be an opportune time to buy in because good companies get hammered down with the poor companies and might be sitting at attractive valuations. Rebalancing your portfolio during a market downturn may create additional return potential with lower volatility.
That being said, it is always wiser to ensure your emergency funds and investment strategy is optimised for different outcomes. Interested to learn how you can map out yours? Reach out to me and let’s talk about it.
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