Is this stock market crash different?

This time is different. We often dub this phrase ‘the four most dangerous words in investing’.

Each market fall really does feel different. The circumstances around each crash are usually distinct, and can be very important. The story can also change how we feel, and therefore act.

If we look back over the history of markets and strip away the stories, we’re simply left with a massive set of data. Ups and downs, and what happened next. Stripping away the story can help us take an objective view of how to handle our investments in times of crisis.

We recognise this is an incredibly trying time for our clients, friends and families. The virus is having an enormous human impact, and we’d like to thank all key workers for their efforts in this time. We aren’t doctors or epidemiologists, so we’ll focus on what we do know to help you through this turbulent time.

As always past performance isn’t a guide to what might happen in the future, and all investments can fall as well as rise in value, so you could get back less than you invest. This article isn’t personal advice. If you’re unsure, seek advice.

Crashes are inevitable

Sharp falls in prices are part and parcel of investing. Last time, we wrote about some of the more recent price drops and what we can learn from them.

Stock market falls – lessons from history

They all had compelling stories. Take the 2008-09 global financial crisis.

Peak-to-trough in the FTSE All Share you’d have seen values drop by almost 50% over the 18 months. But five years from the peak, with the fall in the middle, you’d have made more than a 30% gain overall. Not bad considering the headlines at the time – lots of people thought it was the end of capitalism as we know it.

Chart showing FTSE All Share from 2005 to 2015

Scroll across to see the full chart.

Past performance isn't a guide to the future. Source: Lipper IM, 01/01/2005 to 31/12/2015.

Could I lose it all?

When you buy shares in a company, you’re paying for a portion of the profit you think that company will make in the future. A share price is usually determined by the expected earnings, and how risky people think the business is.

Share prices change when the outlook changes. If we look at the big picture, we don’t think what’s going on right now will change much in terms of company earnings way out in to the future. If you think a business is going to be around for the next 100 years, a short-term shock shouldn’t change your view too much.

But we’re seeing some greater risks. Remember some companies have massive piles of debt that they still need to pay interest on, rain or shine. If people aren’t buying products or services for a few months, this could have big implications for these businesses.

That said, in order for an entire stock market to reach zero, everyone must think that all companies are going to make no money at all forever.

But what if this time is different?

There aren’t many of us today that will remember what it was like living through the 1918 influenza pandemic. It’s said to have infected 500 million, a third of the global population at the time. The devastating mortality rate resulted in at least 50 million lives lost.

Unique to that pandemic, mortality rates were exceptionally high in healthy young people. The virus punched a huge hole in the global labour force. Markets collapsed.

But following one of the steepest falls in market history, one of the strongest rallies followed. Despite a World War followed by the deadliest flu we’ve ever seen, people pulled together and the economy and markets rebounded.

That was a long time ago, and we’re arguably better placed to tackle such a pandemic today, despite being more globally connected than ever. In 2008 the World Bank said a severe flu pandemic similar to that of 1918 would cost $3 trillion. It’s an enormous sum, but the 2008-09 global financial crisis cost over $4 trillion, according to the International Monetary Fund (IMF).

Read between the lines

What happens when we just look at the numbers?

By looking at data from over 300 years, across more than 100 global stock markets, we start to see a theme. No matter what was thrown at the population and the markets, we typically came back stronger.

When looking specifically at big market drops, things usually bounced back very strongly. Investors who continued to offer capital to businesses through the tough times were rewarded with even better returns. Greater rewards often come with greater risk, so this shouldn’t be all too surprising. Please remember that past performance is not an indication of what will happen in the future.

Moral of the story

Diversification is the cornerstone of effective investing, and a wide mix of investments will have almost certainly helped over the last few months.

A diversified portfolio could lead to better, more consistent long-term returns. However, knowing how to build and maintain a diversified portfolio can be tricky.

See our top tips on how to build a diversified portfolio

Following a crash, most people tend to reduce the amount they invest in shares, but this can be counterproductive. Stick to the strategy you set out with and don’t sabotage your plan.

If you’re thinking of selling, you may also look to buy back in at some point. We know the best returns usually follow the largest market falls, although there are no guarantees and even the professionals struggle to effectively time the market. If you need some cash, think about dipping in to your emergency cash fund – you set it up for times like this.

All market falls are painful, but if you found this has been a bit too much to stomach, your risk profile is probably a bit higher than what’s right for you. Remember the market could fall further from here, so make sure you have the right mix moving forward.

Our advisers can check you’re on the right lines, or look after all the decisions for you. If you decide to take advice, charges will apply.

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