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Tuesday, 13 March 2018

Emotional survival for stock market crashes

After seeing the share market take a wonderful and scary dive at the start of February, I started thinking about how it felt to me - seeing the value of my investments drop by a couple of thousand - and how it would feel to others with bigger accounts.

While I'm early in my journey and quite happy to see market values drop so I can acquire more for less, I'm trying to imagine how it will feel when I have a bigger investment, and a market correction hits.

Here's a few ideas to manage the panic moments.

Don't panic

Firstly, take a breath, have a beer and don't panic. Panicking isn't going to push the markets back up, but it is going to affect your physical and mental health, and it's going to drag down your ability to think through the next steps.

If you're having trouble keeping your emotions under control, this isn't time to make a big decision. Instead, take yourself outside the house, or invite some friends around who don't talk money. Take the time to do something else and relax for a bit before taking any actions.

Review what you own - not what it's currently worth

If you bought ten avocados at $5 a piece, and then see them on sale for $2each, you still have ten avocados. It might be a bit of a kick in the teeth that you're $50 out of pocket for something you could now get for $20, but you've probably got the good quality stuff, and the price will change again tomorrow anyway.

At the start of February the value of my portfolio dropped dramatically, but the amount of stocks that I owned didn't. A few days later, the price came back up, and because I bought (instead of selling) the value of my portfolio is higher than it was.

The February drop in my International Vanguard Shares.
I bought more while the price was down ;)

Remember this is all part of the plan

If you're planning for the long term, then that plan includes market correction, crashes and blips. While it might hurt at the time, you know that in the long term you'll barely notice this blip on the charts. 

The oft-quoted number for share market returns is 7% an average per annum after inflation. Note the word average. This means that some years will be great, some will be a bit meh, and occasionally it will have horrible moments. If you have years of greater than average returns, you're going to eventually need a doozy of a drop to bring things back in line. 


Double down?

The part that hurts about a market crash is knowing that what you paid for something isn't what you can sell it for. If I bought my house for $300,000 and someone offered me $150,000 for it, I'd be pretty offended.

But, if my house cost me $300,000, and the identical house next door was selling for $150,000 then I'd snap that thing up! I know that right now no one will pay me $300,000 for it, but I also know that my house is pretty great, and buying a second one for half price wouldn't be half bad. I could rent it out and bring in some cash to cover both mortgages.

Now I own two assets that are valued at $300,000 and I'm $450,000 out of pocket (1.5x more spent than owned). Not a pretty picture, but a much nicer one than being $300k our of pocket for a $150k asset (2x more spent than owned). I'll balance my costs by renting out the spare house, and when the values climb back up I'll have two assets growing.

The same applies to shares, but in smaller amounts. If I own 10,000 shares that I bought for $5 each, then my average purchase price is $5. If the price drops, and I buy another 10,000 I can bring my average purchase price down, so when the prices bounce back, I take full advantage of it. I covered this idea in detail in my post on Dollar Cost Averaging and Dollar Value Averaging.

FIREy wrap up

Investing is a long term game and you need a long term plan. If you have one, then drops in the market shouldn't stress you out. You can even work through a bear market with a good plan. While it might suck for it to hit just before (or just after!) your retirement date, the world won't end. Worst case you can head back to work for a bit longer. Best case you've got cash lying around to invest. Either way, check your plan, take a breath before acting and remember that in a few years time this will just be a little bump in the road.


6 comments:

  1. Fantastic comparison, the avocados made me laugh :) if I saw a similar house to mine half price you better believe I'd have that offer submitted within minutes too. Cheers to riding the waves, both the ups and downs.

    ReplyDelete
    Replies
    1. Is it even a personal finance artivle if you don't mention avocadoes? ;)

      Waves are the perfect analogy - the tide goes out before a tidal wave. Bigger peaks mean bigger troughs. Etc. etc.

      Delete
  2. i m going to be sinic but i didn t felt it at all (the feb dip) because to me the scary stuff is when ppl lose jobs and recession occurs !
    ps: that s not good because i would panic!
    cheers

    ReplyDelete
    Replies
    1. Very true! While the markets blipped, it's definitely not a scary situation until heads are on the chopping block.

      The markets are tumultuous, and we all need to ride the waves.

      Delete
  3. My thoughts exactly about avocados! They are the 'widgets' of the personal finance world.

    Having tentatively bought my first shares in 2010, I've been building up courage since then while waiting for a crash. Hurry up and happen already!

    ReplyDelete
    Replies
    1. I hope you aren't waiting for a crash before diving in? The last 8 years have brought amazing returns. While buying in just before a crash is unpleasant, long term staying out is worse for your finances.

      Delete

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