Wednesday 22 July 2020

How to Respond to a Stock Market Crash

We don’t want them, we don’t look forward to them, but they are certainly a part of investing in the stock market. Yes, I’m talking about dramatic stock market crashes. 


These tend to occur about once every 5 years (slightly more frequently than an average economic cycle). 


There is no official definition for what magnitude of fall is needed before a temporary slump will be labelled a crash. Some crashes can be particularly deep, such as the dot-com bubble bursting in 2000, which led to the Nasdaq falling by over 75%. 


Other crashes can be shallower but prolonged, such as the 2007 financial crisis impacting the FTSE100, which took over 5 years to return to its pre-crash high.


So while the definition may be a little loose, you’re not going to be particularly bothered about semantics and labels when your portfolio is over 20% in the red, so let’s agree that when you’re experiencing a stock market crash - you’ll be very aware you’re in one.


How to respond to a stock market crash - step 1


The first thing to do is to not panic. In the few weeks of heavy and sustained price falls, it is common to expect that this will continue for weeks and to think about selling your equity investments to try and avoid further pain. 


This is not a clever move. 


The act of selling after a period of losses, first of all, guarantees that you are not selling for an optimum price. If an asset was trading for 10% above its latest value just one week ago, then your trade at the lower price is effectively a fire sale. Not a great way to get the most value from your investment portfolio. 


Secondly, you really do not know what the future holds. Yes, a strong depression in prices over the course of a week could signal that a full stock market crash is coming. But if you study the price graphs of any stock market indices, you will find countless examples where a sharp downward trajectory was cut short and the index soon bounced back. 


Imagine the regret you would feel having sold at 10% below recent values, only to see the stock price recover days later. 


This is why financial advisers and investment managers encourage you to not ‘panic’ when the mood of the market suddenly changes. A stock market crash is not as likely as it might feel. 


Here are some more resources you could visit to learn more:

Investing world

Financial Experts 

Investment properties 

The following resources will be more of interest to beginners, as they go into more detail and bring in new concepts at a slightly slower pace. 

Books promoting 

investing diversification 

I also thought it would be useful to share the final three sources which have helped me tremendously in the last few months and years in gaining new financial insights:

Investment strategy 

Investment portfolio books 


Investing books


How to respond to a stock market crash - step 2


The mindset I encourage you to adopt is one of a predator. When others are weak, this presents an opportunity to pounce and take their lunch. 


In the investing context, I’m talking about the concept of ‘buying the dip’. Buying the dip is the phrase given to buying shares after a savage fall in prices. 


Doing so requires courage because the fact those prices are low suggests that other investors are in a full-blown state of panic about the prospects of corporations.


Buying from these investors is a signal that you believe the long term performance of these businesses will eventually return to the mean, and you will harvest profits as the price tracks back to its original position. 


Buying the dip is not a short-term trading strategy - nobody knows if the stock market will generally rebound in a strong way, or whether it will take years of growth to return to health. Rather, it is a way of ensuring that you buy low. In contrast to the first point - if you buy after a crash, then you know you are getting good value for your portfolio. 


If we only ever bought shares during times of nationwide economic catastrophe, we would probably enjoy consistently higher returns than those who buy shares when times are good. 


How to respond to a stock market crash - step 2


Overall, responding to a stock market crash is a mind-game. There’s nothing technical about it. 


The stock market is issuing you a challenge, and you can either fold or go all in. 



Tuesday 2 June 2020

What Is the Best Form of Investing Education?

What Is the Best Form of Investing Education?


In this article, we’re going to take the time to compare some popular forms of investing education. The internet and other developments in learning have created a microcosm of different ways to access content about investing and money in the modern days. 


Let’s look at how these learning opportunities compare against one another, and decide whether one appears to be substantially better at educating than the rest. 


Of course, we’ll need to generalise in this article to allow us to come to any form of opinion. We’ll categorise the various types of education below, but there may be other forms and some may sit somewhere between these categories in reality. You’ll need to forgive any generalisations you feel are unfair, but of course please leave a comment below and start a conversation with us if you have a different opinion. This is an opinion piece after all, and I invite you to share yours with us so that we can continue this discussion. 


The different types of investing education


I see three main categories of education providers today:


  1. Traditional education providers, such as colleges, universities and professional qualification private education providers (such as BBP, Kaplan in the UK for example).


  1. Friends and family and others in your personal network of contacts


  1. Investing book authors, online course curators and YouTubers


Are you surprised at this list? Do you find it strange that I’ve listed ‘friends’ next to ‘universities’? Of course, I recognise that there is a huge gulf between the reputation (and expense) of these two options, but I’m trying to be practical. There are many ways in which we can learn how to invest, and simply being taught by someone you already know is a very, very common way to learn, so it’s worth recognising this here. 


What does financial education comprise of?


Also, while a friend is unlikely to be able to offer 25 hours of solid lectures on financial matters, it’s probably true that you don’t need 25 hours of content to get a firm grasp on the basics of investing. You don’t need to be an Oxford Professor of Finance to be able to buy shares, after all. 


What you need is a good understanding of the basic principles that govern the pricing of financial markets, you need to understand how different investments actually ‘work’, and their risks and rewards. Finally, you need to be taught how to create a portfolio of investments that will weather any financial storm and produce long term returns which compensate you generously for the risks you have taken.


Which investing education format is the best?


The simple answer is that there isn’t a single best source of investing education, but you knew that I was going to tell you that. 


Much like investing advice in general - you should always think about your own circumstances rather than take instruction from generalised ideas and principles. The same applies to education. What are your learning needs? Do you need practical knowledge on how to place a trade? A friend might be perfect for that.


Do you want to understand the advanced theories behind portfolio construction? It sounds like you may need formal training to explore that topic.


Or do you want to understand the ‘common sense’ actions that most investors take, and get some simple portfolio ideas? If so, then a free investing course or investing book might be enough to get you to a place of confidence. 

It all starts with you, your needs and how knowledgeable and confident you currently feel. Education is a tool you can use to move you from where you currently are, to where you need to be. Only you understand your current location and how far you need to travel!