Falling stock markets are dominating the financial press at the moment. Have you heard all the panic in the media? Crazy right?
A blog post I read some time ago changed my opinion of investing in stock markets.
The post outlined how stock indexes had performed over a long period of time. The amazing growth in stocks over many years immediately drew me in. It was a light bulb moment…
…and then I kept reading the detail.
The blog post went on to show the returns if you removed the ten best days or the ten worst days of the year.
This is when things got really interesting, and what led to my change in opinion.
The light bulb moment was when you removed the ten best days from the returns of the index, the growth was a lot less impressive. I mean a lot! Sounds obvious, however the point was made and changed my opinion of markets instantly.
Suddenly the stock markets where looking rather flat and boring in terms of capital growth.
Falling Stock Markets
In the past couple of weeks we have seen falling stock markets all around the world, accept China!!!!! To date markets in most countries have fallen more than 20% from the highs. In most cases these highs were new all time records.
In most financial market discussions, 10% is considered a correction and 20% is a crash. A crash is normally blamed on some external event, and guess what, we have something external to blame right now.
Now when we say a period of time, the US has been in a more than ten year bull market, which is a long time in stock markets.
Normally after a correction, the buyers quickly return and push prices back to the highs and even beyond.
A crash is a little different. The fear is greater, the selling becomes self perpetuating and before you know it there is widespread panic. The wealthy however, they do things differently.
Falling stock markets for the wealthy are an OPPORTUNITY. Historically, it is when they make their best returns. It reminds me of Warren Buffett’s quote that I seem to be repeating regularly, “Be fearfuil when others are being greedy, and be greedy when they are being fearful”.
At some stage the conversation in the broader media will switch from panic and fear, to the turn around and how ‘cheap’ the markets are after the ‘crash’. So myy recommendation to you is to be ready to take advantage of this opportunity.
The Big Stock Market Crash
Crash is a term the media love, it creates great attention grabbing headlines, especially for those investors who are now full of fear.
As you can imagine, for those people relying on the value of their stock investments to fund retirement, this can be a very distressing time.
I did some more research, and it turns out that stock markets have a history of responding well and quickly to these types of events. Over the last twenty years there have been a number of events, such as pandemics or epidemics, that have resulted in large fall in stock markets. The good news is that in the following twelve months markets have an average growth of 20%, not bad right?
Despite what you might hear, nobody actually knows right now what is going to happen. We just have to wait and see how things pan out over coming weeks. Witht he amount of money being poured into economies around the world, it is likely to be a quick bounce back, as long as things return to normal reasonably quickly of course.
So What Now Then
When it comes to investing, you all know that I am a big proponent of consistent action over the long term to secure your financial future.
This brings me back to my lesson from the blog post I mentioned earlier.
The thing about not being in the stock market is the very real risk that you will miss out on the best days, and your portfolio performance will suffer as a result.
This is why a consistent approach to the market is the key.
Consistent, regular investing is what gets results over time. Trying to be the next financial guru that picked the top or the bottom, and only investing when YOU think is the right time is doomed to fail.
Neither you nor I know what is going to happen tomorrow. Far better that we remove that stress from our life and instead focus on the long term goal.
A Falling Stock Market and Approaching Retirement Soon
Now having said that, if you are approaching retirement and most of your life savings are tied up in the stock market, then you might want to take some protection. Your focus will be on preserving your capital value to provide the income you need in retirement.
You don’t have the same time frame as someone just starting out or someone who is twenty years away from retiring.
For everyone else, the lesson I learned that changed my opinion about falling stock markets, was that I needed to be in the market all the time. A consistent approach of adding to my portfolio over a long period of time was far less stressful…
…and a lot more profitable than trying to pick when to be in the markets, or when to sell. The panic selling in times like these is what actually fuels the crash.
The key to your long term financial future is a plan. That plan is to be consistently adding to your portfolio.
Like I said, you will probably start hearing soon that stocks are at bargain prices. You might as well pick some up, right?
Let me know in the comments if the falling stock market has caused you any discomfort recently and what you are doing about it.