men in a lifeboat

Blizzards, lifeboats, and what you should you do if there’s a big market downturn

The nature of investment markets means that values will rise and fall. Companies, nations, regions, and sectors will all have good times and tough times, and that will impact on share and fund prices.

This fact of economic life means that investing is never a smooth journey.

If your investment portfolio is suitably diversified, you’ll reduce the risk of a decline in a particular market having an overly negative impact on the value of your holdings.

But sometimes there’s a cataclysmic event that affects all markets, not just particular countries or sectors.

Read on for what you should do if this happens and there’s a significant investment market downturn.

What would you do in a blizzard?

Here’s a scenario that you could easily face.

You’re out driving in poor winter weather and a blizzard suddenly hits, reducing visibility to zero and making continued driving impossible. You’re forced to pull over to the side of the road.

You’re tempted to get out of your car and start walking to “safety”. But which way do you go, and how far do you have to walk? More importantly, how will you manage in sub-zero temperatures, unable to see more than a few feet in front of you?

The better solution is to do nothing. You know blizzards happen, and you know they blow themselves out. Wrap yourself up, stay as warm as you can and wait for it to pass – because blizzards always do.

Doing nothing will be uncomfortable, but you’re less likely to get frostbite, or worse.

Going against your instincts can be difficult

The natural reaction at times of turbulence and upheaval is to want to do something, mainly because it seems odd not to.

As I’ve said, if you’re stuck in a blizzard, it’s hard to avoid the temptation to get out of your car and start walking.

Not reacting to bad news or events can tend to go against human nature. That applies equally to investing as it does to bad weather.

Often the best thing to do is “nothing.” Moreover, sometimes the best thing to do is the exact opposite of what you think you ought to.

The Covid downturn was a financial blizzard

When the Covid pandemic hit in March 2020, all major markets around the world fell sharply.

You can see in the chart below how the FTSE 100 was affected.

Source – Trustnet 10-year FTSE 100 performance 10 February 2012 to 10 February 2022

This chart shows the FTSE 100 journey over the last 10 years. I’ve rebased to zero from February 2012, showing how money you would have invested then would have performed.

You don’t need me to show you when Covid happened.

The key thing to note, however, is that the FTSE 100 recovered – quickly at first and then, after a plateau, it’s shown steady growth since November 2020.

If you were to look at investment charts in the wake of other traumatic worldwide events, you’ll see similar outcomes.

So, the sensible response to the Covid crash was to do nothing, even though all your instincts, driven by media comment – because the media love a good crisis – would have been to do something.

The counter-intuitive response

Another positive response after the market fell in March 2020, which sounds counter-intuitive, would have been to buy more shares. Our second chart shows what would have happened if you’d invested more money in the FTSE 100 on 1 April 2020, soon after the Covid crash.

Source – Trustnet FTSE100 performance 1 April 2020 to 10 February 2022

This looks very look similar to the chart above, but don’t forget the time period illustrated is less than two years rather than 10.

Although less than two years is nowhere near a long enough time frame to assess the efficacy of an investment option, by buying cheap stocks as the market fell, you’d have maximised your potential opportunity for profit during any future recovery.

Another example from history

An even more dramatic example of when doing nothing or doing something against the prevailing grain comes from the mid-70s when the oil crisis prompted worldwide economic turmoil.

According to Stock Market Almanac, the FTSE All Share Index fell 55% in 1974. An investment of £1,000 at the start of the year would have been worth just £450 by the end.

In 1975 the same index went up by 136%. So, if you’d held firm, you’d have got all your money back, and more, in 12 months.

If you’d bought more stocks while the market was on the way down in 1974, you’d likely have turned a tidy profit by the end of 1975.

Successful investing can be about your state of mind

One big secret to investing successfully is being prepared to accept a short-term fall in the value of your investments. A fall could be as much as 30 or 40%.

Volatility and sudden market corrections are very much part and parcel of investing money to grow your wealth. The key is to learn from history that markets will nearly always eventually recover lost ground, even though the recovery can sometimes be sluggish.

If you can deal with that, you’re a big step forward in your investment journey.

A market crash is only a problem if you’re selling (and even then, it’s often not a problem)

It’s a basic economic tenet that the value of something is the amount someone is prepared to pay for it. But if you aren’t selling it, or don’t have to sell, then surely the value is somewhat irrelevant?

Now, I accept that’s a slightly flippant comment, especially when it comes to something important like the value of your pension fund.

But if you’re ten years from your planned retirement date, the day-to-day value of your fund is pretty immaterial, just as long as you have a robust strategy in place to manage your fund as you get closer to the time you’ll want to start drawing from it.

This brings us on to our last point.

Make sure you check your lifeboat regularly

Rather than the blizzard analogy I used earlier, many investment analysts talk of a “lifeboat drill.”

Any prudent ship’s captain will conduct regular lifeboat drills, and it’s no different when it comes to your investments.

It’s important to review your investments and financial plans regularly. I would normally recommend you do this annually, and more frequently as you get closer to retirement.

A good lifeboat drill will review your portfolio and check it’s still fit for purpose and can withstand downturn and market shocks so that your future prosperity isn’t threatened.

You should also use an effective cashflow forecasting tool, so you can gameplay various scenarios and ensure you stay on course for the retirement you want.

Get in touch

I can help you put a robust investment strategy together and carry out regular lifeboat drills to check you’re on track.

To find out more, please give me a call on 07769 156 250.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Foster Denovo Limited is authorised and regulated by the Financial Conduct Authority.

The Financial Conduct Authority does not regulate school fees planning, taxation & Trust advice and Will writing.

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