Important Guidelines to Survive a Stock Market Panic
By Professor Pierre Fournier
It’s been a rough week.
In addition to overall concern about the coronavirus pandemic, stock markets crashed, bond yields shrunk and gold gave up some recent gains. Bull markets died, bear markets took their place, and a global economic recession suddenly became a very real possibility.
What’s more, so-called circuit breakers on the New York Stock Exchange were triggered twice this past week after sudden drops in stock values. With that in mind, find below few guidelines to survive market major pull-back.
Should you panic
You should not. That quite often leads to bad decisions. Emotions are your worst enemy.
Stocks sometimes go down, but some investors may have forgotten that since they have been mostly going up since the global financial crisis more than a decade ago.
Market drops are an unavoidable feature of investing. Therefore, do not panic.
How much lower could markets drop
Everything can technically go to zero, but that is highly unlikely to happen here. Governments and central banks are already giving the global economy shots of adrenaline and pumping billions of dollars into financial markets. Stock prices tend to take the escalator up, but the elevator down. Still, Canada’s main stock index this past week shed more than 15 percent of its value. Although stocks rose again on Friday, they remain well off their previous highs, underscoring the old investing maxim that stock prices tend to take the escalator up, but the elevator down. The market dropped roughly 45 percent from its top to its bottom during the global financial crisis a decade ago.
How long will this pull-back last
It could be a while. The average bear market in the United States lasted nine months and resulted in declines of 29 percent. Clearly, investors are most freaked out by the spread of COVID-19 and the economic repercussions stemming from the outbreak. None of the previous event-driven bear markets were prompted by a virus or occurred at a time when interest rates were as low as they are today. This could raise the concern in markets that there is less room for an effective policy response, so there may need to be some more positive signs before things truly start looking up again. The market is probably in a process of pricing in a global recession. While the process is not over yet, if the virus has dealt its worst blow by the third quarter, markets might then look ahead to an economic recovery of some sort in 2021. That could leave room for equity markets to reassess beaten-down sectors.
Should you buy the pull-back
Many of Warren Buffet's greatest investments were made when the company was experiencing a temporary setback that drove the stock down. As Buffet says, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down". It is a good time to remember one of Warren Buffet's classic rules: Be fearful when others are greedy, and be greedy when others are fearful. At any rate, shares of most companies have become cheaper over the past three weeks. Unless society collapses (and if it does, stock-picking may be less of a concern than, say, finding water), businesses will still be around in some form.
It is an opportunity to buy those great businesses that looked expensive months ago that are cheap now.