How to prepare your ‘collapse strategy’

Simon Brown, founder and director of
Simon Brown, founder and director of

FOMO (fear of missing out) is real in our life and in the current markets.

As markets were collapsing, with some of them down by over 10% on certain days, I was getting more messages from investors than I could reply to, with them asking if they should buy “this stock” or rather “that stock”. 

Some of them were even asking how to trade forex, bitcoin or equity derivatives. I’ve seen this kind of reaction before with incidents at Steinhoff, African Bank, EOH and others. 

Most recently it has been Sasol, with people clamouring to buy the share at R180, R150, R120, R80, R50 and finally some below R30. Will Sasol reach those levels again? It is very possible, but it’ll be a long road and only one of those entry points to buy has so far delivered on the promise of quick money that FOMO demands.

The point is that a market collapse is not a once-in-a-lifetime opportunity. In my (admittedly longer life as I’m now old) this is my fifth market collapse. 

It started with the 1987 crash (literally days after my first ever share purchase), then the emerging market crisis of 1997-1998, which was followed by the dotcom bust in 2001. After that the 2008-2009 global financial crisis hit and, now, we are in the midst of the Covid-19 market collapse. So, I am running at about one per decade – which is fairly frequent.

That said, I agree that market collapses do offer opportunity, but we need to be smart about them and keep ourselves within our overall investment strategy. We can’t wake up one morning and decide we’ll become a derivative trader by the afternoon. If we try it out by the evening, we’ll be broke, having lost our money in record time.

Personally, I got the first three collapses completely wrong and made every mistake in the book. I’d panic and sell. I’d buy but get scared at the share price’s next leg down, exiting the positions. After the dotcom collapse it took me forever to work up the courage to buy again.

Finally, in the 2008-2009 collapse I managed a decent job with my investments buying equity and ETFs in blocks every three months from September 2008 to March 2009 and holding on to them. This made me realise I needed a proper “collapse strategy” that would sit ready and waiting for the next collapse, and it’s been a long wait – but investing is about patience.

So now my strategy is simple. When the market moves down by more than 20%, I double my monthly purchase of ETFs: I’ll keep buying the same ETF I do every month, but just spending twice as much. Because markets are cheaper and are offering what I’d call a sale, I get more bang for my buck. I keep these double-sized purchases going until the market makes new highs once more, which will likely be in a couple of years.

There is of course the risk that I run out of money to make the double purchases, but I always have an overly chunky emergency fund that I can take a limited amount of cash out of. I can also just simply eat out less.

On the equity side I’m a lot more circumspect. We’re going to see a lot of bankruptcies and, while I have an idea which stocks are at risk, there will be some left-field companies going bust that I would never have expected. 

So here I am waiting for at least six months before I’ll start looking at new stocks to add to my portfolio. This gives me time to check some results to gauge the true impact of the crisis on a company. It also means I am not buying stocks at the bottom, but that’s fine. 

FOMO has lost investors more money than it has made them, and I prefer the better risk-reward ratio that comes from waiting.

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