Since I started investing, there is always a crisis to worry about, be it economic or geopolitical.
Lately, we see a lot of news headlines that states “worst financial crisis since 1929” and “global recession” caused by the COVID-19. The S&P 500 hit a high on 19-Feb-2020 and plunged by 34% over the next month till it bottomed on 23-Mar-2020. People started to draw reference to the 1929 Great Depression. The stock market crash of 29-Oct-1929 brought the S&P 500 down 86% in next 3 years and did not recover to the previous peak till 1954.
However, what we saw since the S&P 500 bottomed at 2,237 on 23-Mar-2020 was a meteoric rise by 42% in the next 2.5 months! Was there a crisis to worry about?
We will encounter crisis all the time. Below is a quick summary of the major events in the past 20 years.
- 2000 – Dot com bubble
- 2001 – Sep 11 attacks
- 2002 – Uruguay banking crisis
- 2007 to 2009 – Global Financial crisis
- 2010 – European sovereign debt crisis
- 2014 – Russian financial crisis
- 2015 – China stock market crash
- 2016 – Brexit
- 2018 – US-China trade war
- 2019 – US President impeachment and start of COVID 19 in China
- 2020 – COVID 19 global pandemic, negative oil prices and stock market crash
You will realise that the past crisis seemed huge at the time when it happened. Words like “unprecedented” had been overused in a way. However, the markets always recovered much stronger way ahead of the economic recovery.
Is the COVID pandemic crisis so bad?
In a recent interview by Yahoo Finance with Warren Buffett, he was asked for his opinion on the COVID 19 pandemic and market crash. He responded:
If you stick around long enough, you’ll see everything in markets.
And it may have taken me to 89 years of age to throw this one into the experience, but the markets, if you have to be open second by second, they react to news in a big time way.
It wasn’t October 1987, but it was an imitation…and the combination of the coronavirus and what happened to oil, that’s a big one too.
And the 2008 financial crisis was much more scary, by far, than anything that happened yesterday.
What should you do to get ready for the next crisis?
Economic and geopolitical crisis will come and go. To ensure you seize the opportunities that arise, make sure you are ready with the following:
Have an emergency fund
One of Singapore’s top political leaders Mr Tharman Shanmugaratnam in his Facebook post said the country faces a “major and urgent challenge” in the next six months to a year, warning of more job losses ahead amid the coronavirus outbreak. This is why an emergency fund, which can cover expenses for the next 6-12 months, is crucial to weather the storm ahead. In the recent OCBC survey, it is interesting to note that 2 in 3 working Singaporeans do not have savings to last then beyond 6 months. Do you belong to the majority or the 1/3?
Prepare a stock watchlist and game plan
As the saying goes – If you fail to plan, you are planning to fail. Mr Market is temperamental and will throw up opportunities, sometimes when you least expect it. Do your research on good businesses to buy and create a watch list. Remember to maintain position sizing on your investments and never over-allocate into any single stock. It could be a simple methodology of investing maximum 5% of your cash in 1 stock. Have a game plan ready for execution.
Do it during peace time and not when you are in a panic.
Set aside money to invest in the next crash
After setting aside sufficient cash to cover your expenses and having a game plan, it is down to execution. Act with conviction if you already have a plan in place. Think long term when investing and have a simple tiered approach like this (Keep it short and simple so you can action!):
- If market goes down 10%, invest 20% of cash
- If market goes down another 10%, invest 30% of remaining cash
- If market goes down further by x%, fire the rest of your bullets
The Chinese translation of crisis = 危机 (Danger and Opportunity). It is how you seize the opportunities during the dangerous times that will put you in much better financial position post-crisis. Enjoy your journey in the world of investing.