Sharemarket crash: it will happen again, so how will you react?

Peak season for stockmarket collapses is in full swing, so it pays to prepare your reaction for when the next crash hits.

We’re right in the middle of danger season for sharemarket collapses, and Aussie stocks seem to be holding up well.

Sharp moves in shares in recent weeks – often by 1-2 per cent a day – suggests there’s increasing nervousness amid an escalation of global issues threatening financial markets.

September and October have traditionally been the worst months for stockmarket crashes – think October 1929 and 1987, or September 2001 and 2008. There’s even a common saying among investors to sell in May and go away until November.

Our sharemarket is currently about 5 per cent below its record high reached in August.

Overseas markets in the US and elsewhere have also limited their falls, despite concerns about fresh Covid spikes, a housing crisis in China, a power crisis in China, and China in general.

There’s still almost a month left of this danger period, and nobody knows whether we’ll get through it relatively unscathed.

But a crash will come. Maybe not this month. But some day, and some experts say it will be sooner rather than later.

Now is a good time to ask yourself how you’ll react when shares next plunge 20 or more per cent, and to remember the advice of experts who’ve seen it all before.

A BUYING OPPORTUNITY

There was a surge of new stockmarket investors when our market dropped more than 30 per cent in last year’s Covid crash.

They saw cheap shares as a great buying opportunity, and while they haven’t experienced another nasty fall since, they should remember that market crashes deliver discounts.

Nobody likes to watch their share portfolio sink, but it can be a great buying opportunity.

Dividends will buy more stock when reinvested, employer superannuation contributions buy more units at lower prices, and investors wanting to grow their portfolio further get more bang for their buck.

Just because there’s panic in sharemarkets doesn’t mean that Aussie companies are suddenly poor investments.

STICK TO YOUR PLAN

It’s a good idea for all investors to have some sort of exit plan, even if it simply says you will hold a stock until you retire and live of the dividend income.

And if that’s your plan, don’t let annoying little things like sharemarket crashes cause you to deviate.

Trying to time buying and selling is fraught with danger, and investors who do this will often sell out right at the bottom of a market – when everyone is capitulating – and not buy back in until stocks are well down the road to recovery.

Plans will test your patience. Ahead of the Global Financial Crisis in 2008 my plan was to buy extra shares every time the market dropped 5-10 per cent. Sadly I went all in at negative 30 per cent, only to see shares sink 55 per cent overall and take more than a decade to recover. It was a valuable learning experience.

AVERAGING IN

Good financial planners recommend dollar-cost averaging, which is buying bits of the market at regular intervals rather than just one big splurge.

This will smooth out investment returns over time and give you opportunities to pick up more stocks when they’re weak and fewer when they’re strong.

A market crash – when it comes – can be a time for a stock shopping spree. But don’t go all in, as I did, and don’t sell out in panic at the bottom.

Originally published as Sharemarket crash: it will happen again, so how will you react?