Looking back on “the great crash” in March

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Many people who have been reading, and indeed watching, my content for years ask me a simple question.

I like your content but surely I can invest myself. My response is always simple.

Yes you can invest by yourself and make money. I have no doubt that you can make money in the good times.

However, if you have never experienced a stock market crash, you never know how you will react.

It is moments like 2020 when we understand the true benefits of having some structured help during the crash.

I will speak about two incredible facts later on in this piece, but in the meantime, let’s look back on late February and March.

It is hard to forget, six or seven months on, how much of a panic we were in.

Markets do regularly fall 25, 30 or even 50%. A 25% fall had happened in late 2018/early 2019, and a 50% fall was recorded in 2008-2009.

That isn’t unusual. What was unusual this time was the speed of the falls, as the graph below shows:

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Source; CNBC

Moreover, perhaps due to the 24/7 social media age we now live in, widespread panic was occurring.

Empty shelves in the US, UK and beyond was such an issue that many supermarkets had to put limits on how many items you could buy.

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Looking back on "the great crash" in March 7

People really thought that this time is different – in investing and life.

As John Templeton said, those are the four dangerous words in investing:

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Looking back on "the great crash" in March 8

Markets have subsequently recovered. MSCI Emerging markets is about 2%-3% higher than on January 1 2020, with the S&P500 and Dow Jones up about 5%.

The Nasdaq is up around 20% for the year. Regardless, markets would have always came back anyway, even if it took a few years, as it did in all previous crashes.

The problem is people seldom see this during the worst of the crisis, and this leads me onto the two incredible statistics I was referring to at the start of the article:

  1. According to research by Fidelity, over 30% of its investors over 65 liquidated all of their stock-market assets between February and May. Yes, 30% of people who are about to retire and had an account with Fidelity, sold 100% of their positions! I think it would be fair to assume that over 50% partially panic sold, even if they didn’t completely sell out. If you include people who didn’t sell but refused to add, then maybe you could have a 75% figure!
  2. I didn’t lose one client during the crisis. 0% of my clients panic sold, even though one or two almost did. 57% added considerably more money during the crisis. The average client returns have been over 8% this year for that very reason – a lot of my clients bought lower and I rebalanced portfolios during the worst of the crisis. In other words, I sold some short-term government bonds, which were going up during the worst of the crisis, and bought stock indexes when they were cheap.

Ultimately, it is a matter of human nature. Investors find taking losses more painful than gains.

This is called loss aversion. Or another way of putting it is fear is a stronger emotion than greed even though both are part of human nature.

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Looking back on "the great crash" in March 9

However, many investors don’t see the difference between a loss and a decline.

So, countless people panic sell during the worst of a crash, and get back in during the good times.

Having some structured help during these times, can persuade you not to do something silly with your money.

It is much more difficult to panic sold if you need to talk it through with somebody, like an advisor, beforehand.

If you invest by yourself, as a do it yourself (DIY) investor, often you only need to press one or two buttons to sell.

Research from Vanguard, the biggest DIY investing group, showed that net purchases of its funds was highest during 1999 and the lowest during the 2008 crash.

That helps explain results like this, as people pilled in during 1998-1999, after an 18 year bull market, and lost during 2008.

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Looking back on "the great crash" in March 10

Investors are good at holding on during a bull market, but struggle during falling markets, or in a “lost decade” like 2000-2010.

I have ran out of the number of people who claim they understand that buy and hold investing beats market timing, but say things like:

  1. I want to wait until the US Election before investing
  2. Valuations seem high so I want to wait
  3. Valuations are low but this time is different
  4. I am thinking about buying gold

All of these things are foolish. Ultimately, then, some people do have the self-discipline to invest by themselves for decades.

You never know if you are that person though, until you have stayed calm during a period of falling markets or stagnation.

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