Everyone’s talking about it, the disastrous day we had in the stock market yesterday. News Anchors are saying it’s the worse 1-day tumble ever or since the Financial Crisis.
Pretty scary stuff, right?
I can’t predict the future, but I can tell you what my experience was in 2007-2009 as we lived through the worse economic crisis in a century. Then, it was called a once-in-a-lifetime event. Could it be happening again?
Since the market turmoil began around 10 days ago, the Dow Industrial Average has lost about 17-18% in USD. It’s nothing to sneeze at. (Sorry, too soon, I know).
But does this mean the world is coming to an end? That markets have crashed? Are we in another crisis?
How the Great Recession Began
I started my finance career in earnest mid-summer of 2006. By the summer of 2007, people I was working with, the people who were experts, were already talking about “crisis”. But I didn’t really know what that meant. The stock market seemed fine. Later, I found out that they were talking about the Bond market. It’s kinda industry legend that the bond market is a predictor of economic turmoil. Though I have not read reports of whether the turmoil is a self-fulfilling prophecy or not, maybe the point is moot. No matter why it happens, it still happens. It happened in 2007 and it happened in 2019.
You might remember sometime last fall when the US bond market signed turmoil ahead. That day the stock market went a little haywire too. It bounced back the next day, but the signals were telling us that the economy was slowing. The adage that hindsight is 20/20 applies here. You’ll be tempted to say, “oh, I knew it. I should have sold out on such and such date if only I had listened to my gut!”
I’m here to tell you, don’t beat yourself up. Most people think about when they should have sold, but they rarely think about when they should get back in and re-invest. This is why most everyday investors miss the bulk of the Bull market when stocks start to the run-up.
Inside the Financial Crisis
During the height of the financial crisis, it also felt like the world was ending. No one was trading with each other. It was bad news day after day. Investors were desperate to sell their stocks in order to protect what they could of their net worth. It’s an understandable instinct. As humans, we honed that instinct over centuries to keep us safe. That instinct spurged behaviour that was very helpful at the time; those knee-jerk reactions to jump out of the way or the reaction to run the other way.
It kept our ancestors out of the mouths of predators.
In today’s day & age, our predators are more abstract. Instead of poisonous snakes, we have the metaphorical snake – a swindler trying to separate us from our money. And we are inclined to see that boogyman everywhere we look.
There were times during the Great Financial Recession when we thought “is the economy going to survive?” With hundreds of thousands of people losing their homes. With some banks almost going bankrupt – and of course, Lehman Brothers actually did. Was the economy going to survive that? If international trade ground to a halt because everyone was too scared to send inventory on credit, how were the factories going to survive?
Things did look very bleak indeed.
Similarities to the Last Financial Crisis
That’s the question we are asking ourselves now, right? With the COVID-19 virus shutting down schools, businesses, stadiums and disrupting daily life. COVID-19 is still new to our shores. We are getting more and more bad news every day. We anticipate how is shutting down our manufacturing or travel industry going to affect us. Are we going to have truckers abandon their trucks outside of quarantined cities as they did in China?
Basically, we are asking ourselves “is the economy going to survive?”
This question and pessimism is then reflected in the stock market. The stock market represents the riskiest stake in a company. In case of emergencies and bankruptcy filings, the stockholder has the least amount of rights. They get whatever is left over after all other liabilities have been paid. These liabilities include staff wages, supplier’s inventory invoices and money borrowed from investors; the bondholders.
You are thinking; yes, so my stock can go to zero right?
It depends on what you are invested in. As all financial gurus have said, it is risky to only hold 1 stock. We learned this sad lessons from the employees of WorldCom or Enron who had most of their investments in their company stock. They did lose it all.
So we are told to diversify. To hold more than 1 stock. The easiest way to diversify has been to buy Mutual Funds, Index Funds or ETFs. These investments are pre-packaged baskets of many different securities. They are different in their industry groups, in their business lines and maybe even in their geographic location.
Even if one of those companies don’t make it and go bankrupt, the other companies will pull through in the end.
A Calm Look into Worse Case Scenarios
What if it’s more than one company? What if I work for one of those companies? That is a real concern. If you have some savings and an emergency fund, you are better prepared than most. If you think that you might be one of the unfortunate that will get laid-off, this article has some tips on what you can do today to prepare.
When we look back into every single crash we have had since the Great Depression, we have seen the economy fight to come back. There will be pain along the process, but through it, we have developed new industries and technologies. Someone describes this development & invention of tech as the embodiment of human ingenuity. Which is an apt perspective because businesses are not separate entities from the people that run it, the person who thought up the idea in the first place.
Yes, but what if this financial crisis is different?
If the fallout of this is worse than we expected, then a lot of prices for things we require will also fall. There just won’t be a large market for those goods. In the microeconomic view, as demand falls, so will prices. In that case, your smaller nest egg will be used to buy lower-priced goods. Not the end of the world after all.
What Should I be Doing?
It might be too condescending to quote the British Wartime poster of “Keep Calm and Carry On”. So first, I will say, it’s ok to have emotions. If you are scared, I get it. This is scary stuff. But what I want you to do is to “respond” to your fear instead of “reacting” out of it.
So how do you respond to fear? First, allow it to be felt. Emotions are like toddlers who demand to be seen. Ignoring them will inevitably lead to a tantrum down the line. Next, try to identify exactly what you are most fearful of. Are you afraid of losing your job? Are you afraid of losing your savings for retirement? Maybe you’ve never been through a downturn and don’t know what to expect.
Once you have identified this fear, then you can go about addressing it. Without the identification first, any action you take is like yelling at your kids because you are frustrated your car won’t start. It’s not productive and likely just adding to your own stress levels. Depending on what your identified fear is, recognize that it might not be something within your control. We, humans, love to be in control and we don’t realize how much of it is just our illusion.
Prepare for the outcome of your feared event the best you can. Trust in your own adaptability and ingenuity to cope with whatever comes your way.
How to Take Advantage of this Market
The way to take advantage is to heed the advice of the Sage of Omaha: “Be fearful when others are greedy and greedy when others are fearful.”
This means that when everyone is losing their damn minds in this downturn and looking to sell, this is the time to buy at firesale prices. Can the market go down further from here? Sure. But I’m optimistic about the economy’s ability to recover over the long term. I still have many years to be invested in this market before I retire, so I can ride out the waves.
If you are closer to retirement, it’s less time to recover, but take a look at this chart below. It effectively illustrates the ups & downs that can occur in any one year. But when you start taking the average of the returns over a 5 year period, you can see that if you hold on just a couple more years, then the market will come back and you’ll be back in the black (or green in this case). Averaging out even further, we see that downturns and financial crises are just a blip on the radar and over the long run, the economy has bounced back and investors have made money overall.
Chart courtesy of Measure of a Plan. Check them out here.
I’m $312,000 down in net worth over the least two weeks. But I’m still smiling. The present value of a portfolio you aren’t spending is irrelevant, it doesn’t really lose value until you sell it.