How to handle the shock of a market collapse

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Founder and director of investment website, Simon Brown. (Photo: Finweek)
Founder and director of investment website, Simon Brown. (Photo: Finweek)

The Covid-19-induced market crash in 2020 may have been the first you experienced, but it won’t be the last. Learn from it so that panic won’t rule your decision-making next time.

2020 has been many things, none of them what we expected. I remember hearing about this new coronavirus in mid-January. Early reports were certainly worrisome and I was keeping half an eye on developments in China.

Then, in early March, on the day the first case was announced in South Africa, I was in Durban doing a presentation on the possible impact the virus – which we now know as Covid-19 – could have on local and global markets.

We’d changed the topic of the presentation a few days earlier, as the magnitude of the virus became apparent. But even then I totally underestimated the actual impact. But I did make two predictions at that Durban event.

Firstly: the impact on markets would be real, with a drop of over 30% very likely. Secondly: global economies would go into recession.

But looking back at my presentation, I realise that I was totally wrong about the actual size of the impact on the global economy. I had massively underestimated how bad it would be.

For example, lockdowns led to the leisure sector having zero revenue for some six months and the industry now faces at least another two-year struggle to recover.

During this pandemic, I have also written about how to manage a portfolio in preparation for what was coming. My strategy included exiting second-tier and high-debt stocks and I continued to buy my monthly exchange-traded funds (ETFs), even as markets were collapsing in February and March.

Now, as the entire world fully enters pandemic response mode, investors can look back at the Covid-induced market collapse and ask ourselves some hard questions about our investments and our emotional response to that collapse.

For me, personally, 2020 was the fifth market collapse I have experienced. The first being back in 1987 (days after buying my first shares) and the most recent in 2008/2009. So, as markets fell this time around, I managed not to panic. I reviewed my portfolio and sold some stocks.

Some of these exits proved to be inspired; others not so much, because the companies and sectors seem to have recovered strongly since the March lows. My above- mentioned strategy of continuing with my monthly ETF purchases is something I always do, regardless, and they’re looking great after the buys at the March lows.

So how was your collapse? For those who only entered the market since the lows of March 2009, this would have been your first experience. How did it feel?

Was it scary? Surely it was, especially if it was your first encounter with falling markets. But did you panic and sell everything? Did you panic and stop investment contributions? Fear is fine, but panic can mean serious losses – especially if one sold during those March lows.

If this was your first market collapse, know that the fear and panic will become less intense every time this happens. I panicked in 1987 and a little less so with the next one in 1998. But dig deeper into how you felt. Was the fear that you’d lose everything? That your retirement would be cancelled? That you owned the wrong stocks with far too many high-risk shares that still haven’t recovered?

Use this market collapse to review how your emotions were affected. Look at how it played out and ask if you need to make any changes to your overall portfolio construction.

Do you have too much in risk areas of the market? Do you have enough diverse ETFs? Do you have enough cash to get through a tough period?

The pandemic still has some way to go, but we should start evaluating our response with regard to our investments. And if you did panic, don’t stress. You’ll be smarter next time because another collapse is a certainty – even if we don’t know when or why.

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This article originally appeared in the 5 November edition of finweek. You can buy and download the magazine here.

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