What will you do when the sharemarket crashes?
Stock markets have been on a rollercoaster ride amid increasing global uncertainty. The best defence against a future fall is to already have a plan.
It’s been a crazy month on the sharemarket, and more crazy may be on the way.
Since watching stocks reach a record high on July 30, we’ve seen the sharpest one-day falls for the year amid a huge wave of uncertainty crashing on global politics and economics.
This has been fuelled by worries including the US-China trade war, Brexit shenanigans in Britain, protests in Hong Kong, and The Donald doing what The Donald usually does.
As a result, Aussie shares have dropped almost 4 per cent in a month, US shares and Japanese shares have dropped the same, while British and Hong Kong shares have fared worse.
It may have felt at times like a gut-churning rollercoaster ride for investors, but in the overall scheme of sharemarket downturns it’s just a children’s ferris wheel.
A 4 per cent fall note even half an official stockmarket correction, which is technically a 10 per cent drop. And many long-term investors will remember the carnage the Global Financial Crisis last decade inflicted on shares — down 55 per cent in less than 18 months.
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Most experts aren’t predicting another GFC, but anything is possible in this wacky world we are living in right now. And that means now is a great time to ask yourself what you would do with your shares and superannuation when the sharemarket next plunges 15-20 per cent or more.
Don’t put off thinking about these things until they actually happen, because then you’ll panicked into knee-jerk reactions, wait too long to sell while wishing for a rebound, or eventually sell out right at the bottom of the market — just before a strong rise occurs.
After Aussie shares bottomed out during the GFC in March 2009, they climbed 55 per cent in just over seven months. Investor who sold everything when markets looked their bleakest never got that money back.
So, before things head south — really south — again at some time in the future, work out today how you plan to deal with it.
Here’s a few things that should shape your thinking.
Firstly, your age. Younger investors have time to ride out market turmoil. And younger probably means anyone aged under 55 these days.
Think about when you’ll need your money. Don’t invest in shares if you want the cash within five years, because downturns can last a long time.
Have a clear investment plan. You can set yourself a level at which you’ll sell down shares during a fall — perhaps after a 10 per cent drop — or simply hang on through turmoil. Whatever your strategy, stick to it and don’t panic when things get rocky.
Don’t stress about superannuation, which usually holds more than half its assets in shares, because super is the longest of long-term investments — a holding time of up to 50 years.
If your super takes a hit from a sharemarket slide, remember that time is on your side. If you’re only a few years from retirement, it may be best to dial down the risk now a little anyway.
Originally published as What will you do when the sharemarket crashes?
