Is A Market Crash Coming?

Stock markets around the world have taken a hit since the start of the year. The global stock market fell 5% in January. The US, for several years the world’s strongest market, dropped even more by falling 6%. With worries about rising inflation and many expecting interest rates hikes (both of which can be bad for markets), some are concerned things could get worse. The big question is then, is there a stock market crash coming?

The answer is 'yes'.

Part And Parcel

Now before you rush to hit the sell button on your investments, we should just clarify we didn’t say when that crash would be. We could be at the start one right now, or this could just be a short-lived wobble. One thing’s for sure though – market crashes (generally considered to be a drop of 20% or more) can and will happen at some point in most long-term investment plans.

Investing involves risk. It’s the risk-taking (in a controlled way of course) that investors are rewarded for over the long-term. A big part of that risk is that your portfolio will be in for a rough ride from time to time, and yes that’ll likely include a few market crashes. If you can’t accept that then investing’s probably not for you. For those that can stomach the downwards lurches though, investing in the stock market has nearly always rewarded those willing to stay the course.

History Of Stock Market Crashes

We encourage all investors to focus on the long-term, but we know some still focus on the here-and-now. It’s just human nature. We can’t learn much from the present though, but we can learn a lot from the past. So let’s see how things turned out after previous stock market shocks.

The table below shows the biggest drops since the start of the seventies. They nearly all follow a pattern starting with a significant fall, followed by a recovery and a healthy gain for those who remained invested ten years on from the start of the trouble. Although the falls, recoveries and gains all vary, the point is things never turned out as badly as they felt at the time.

You may have spotted the odd-one-out was following the 2000 ‘dot com crash’. Investors later also went through the Great Financial Crisis volatility, so suffered two significant drops during those ten years. See that as a reminder we can never rule anything out when investing. History has shown us, however, if you want to stack the odds in your favour, just stay invested.

Time To Jump?

Time in the market, or in other words the longer you stay invested, is one of the most powerful things you can do to boost your investment returns. Surely timing the market – jumping out before a drop and jumping back in as it recovers – is going to improve your returns too though? Sounds sensible enough, but actually getting your timing right and getting it right consistently is extremely difficult.

You could find you were too early, too late or just wrong and market jitters never actually led to bigger falls. The same goes for trying to time a recovery. Many of the most skilled and seasoned investment professionals don’t even try to time the markets. Our recommendation is not to try it either – you could end up worse off than doing nothing at all.

Final Thoughts

As sure as day follows night, markets will rise and fall. Whether current wobbles are the start of something bigger to come, no-one really knows. As we’ve seen though, often the best thing you can do in the face of market turbulence is not much at all. It’s also worth mentioning we’re not going to be changing our portfolios in reaction to market drops. That would be a bit like a dog chasing its tail – you’ll always be one step behind where you need to be for it to work. Instead our investment decisions will remain very much focused on the long term.

Of course we’ve been talking about the stock market, and therefore all-equity investors. So if the thought of seeing your investments fall by 20%, 30% or 40% or more is too much to bear, or you don’t have ten years recovery time to spare, you should consider adjusting the level of risk you’re taking. A well-diversified portfolio with a blend of different investments such as bonds and alternative assets can help you with that.

For those with the time and the tolerance though, we still believe investing in the stock market is one of the best ways to grow your wealth over the long term. History has shown that to be the case too.