I’m an optimist. I believe that tomorrow will always be better than today. After all, that’s why I set myself the WealthyBy40 Challenge because I believe I can scale that high peak.
However, I am a realist at the same time. I enjoy analysing facts. It has been 10 years since the Great Recession. Historical trend dictates that a major market correction would occur once every 10-15 years.
So we are almost there.
I have no idea when the next correction will be (I wouldn’t be here if I did) but I simply know that there will be one. Equally, this means I also don’t know when the next bull run will be but there will simply be one.
I started my investing career 10 years ago at the very end of the Great Recession. This means I’ve never experienced any major market crashes. I have however been part of some minor corrections since then in 2011, 2016 and early 2018.
In preparation for the next major crash and as a note to my future self, I am going to outline the principles that I will abide by so that when the day comes, I can be as mentally prepared as possible in order to make the best financial choices.
1. I will start saving now
Disclaimer: if you can time the market then 100 kudos points to you. Please tell us how you do it!!!
It’s incredibly difficult to time the market. That’s a simple fact supported by numerous studies because we are psychologically ill-prepared as a species to handle market volatility. There’s actually an interesting article illustrating the various thought process going through our head during ups and downs.
I have been very lucky at the start of my investment career 10 years ago because I had access to capital right after the end of the Great Recession, which meant could take advantage of the low valuation that was on offer. I bought my first Apple share when it was trading at $58 in 2011 and this had served me well (shame I didn’t buy much at the time).
Consequently, I will start saving as much as possible now so that when the next downturn happens, I will have plenty of investable capital (the proverbial dry powder) to deploy and take advantage of the discounts on offer.
2. I will not log onto my account for a week
On June 24th, 2016, the day after the British population voted to leave the European Union in a historical referendum and started the Brexit process, my portfolio opened with a 12% drop in valuation, because I ran a rather concentrated FTSE-100 blue-chip orientated portfolio at the time.
It was the single biggest daily reduction in portfolio value I had every experienced to-date.
The FTSE 100 index made up all the loses 5 days after the Brexit vote.
Like many others, I took a rather pessimistic economic outlook for the U.K. should it choose to leave the EU and thus I was rather confident that we would vote to remain. Unfortunately, the reality was different as a black swan event happened.
In a panic, I decided to liquidate all of my UK shares without hesitation.
By the end of the trading day, however, the index was only down 3%. After 2 choppy trading days, the index had regained all lost grounds and by the end of the year, it was edging 16% higher than on June 24th.
After all this, I realised that investors were highly nervous about Brexit and started panic selling the day after, much like myself. However, it soon dawned on some that these blue-chip British companies had a global footprint and derived the majority of their earnings in US Dollars. Since £ has depreciated significantly against$, it actually meant that their earning power would increase relatively as the accounting standard was still in £.
So we were in this perverse situation where the faster the £ sank versus $, the higher the stock price.
How wrong was I to panic!
This could have all been avoided had I just stayed away from my trading account and my portfolio would have fared much better rather than taking a 15% unnecessary haircut.
Lesson learned: delete the trading app from all devices and do not log on for at least a week.
3. I will review the financial position of my portfolio companies before taking any actions
Given that I cannot time the market, by definition it means I would have exposures to equities in my portfolio when the next correction hits.
Taking the learning from #2, I will use the time previously spent on panic trading to actively study the underlying performance of my portfolio companies.
I would try to determine if there are any factors that have impacted the companies negatively to cause a drop in their intrinsic values. My portfolio is largely invested in blue-chip highly profitable companies, so this is unlikely to be the case.
Ultimately there can only be 3 possible outcomes here:
- Do nothing
- Buy more
As long as the intrinsic value has not changed then depending on how much cash I have saved up, I should be opting to BUY as stocks are heavily discounted.
4. I will constantly remind myself that the future is better than the present
The old saying goes that “whatever drops down comes back up“. I am an optimist and I believe in the fundamental resilience and prosperity of the Anglo-Saxon economic model. This means I believe market correction is simply a cyclical part of life’s journey. As a result, a bear market will always be followed by a recovery and bull run.
A study has shown that the time spent invested in the market is far more important than attempting to time the market. This isn’t surprising given how bad at future prediction we are as a species.
This means I will continuously be investing before, during and after each correction. This maximises my exposure to future gains.
I’ve made some dumb mistakes in the past, which I am determined to avoid comes the next correction. I have also been fortunate to see my net worth skyrocket as a result of having invested at the low end of the market.
However I have never experienced a proper market correction during my investing lifetime, therefore, I want to be as mentally prepared as possible and I believe these 4 principles will serve me well.
Have you experienced a major portfolio correction? What did you do? I’d love to hear about it.