‘Is the next big market crash coming?’
…is the questions I get most often right now. Money School readers are worried, and that’s rational. It shows you’re paying attention. Hopefully this blog helps, and the bottom line is:
I’ve decided not to worry about it …mostly anyway.
Here’s why:

Learning the hard way

The pandemic spooked me in a very big way.
On 7 March, I was hosting the Perth launch of my book. There was hugging and a feeling like 2020 could be a good year.
By 12 March, we were pulling our kids out of school. COVID-19 began to sweep the globe and no one had any idea what that would mean for life as we knew it. I didn’t have a clear picture of how our economy might respond – no one really knew. The extent of the uncertainty terrified me.
The next day I switched my super from shares to cash. It’s a classic knee-jerk reaction to fear of a market crash.
I had every intention of switching back as soon as the share market showed a steady upward trend for a month.

…then I got busy with other stuff.

Nine weeks of ‘shelter in place’ with my kids and husband. Trying to do media interviews. Running webinars to help calm people worrying about their money.
Letting my mum know she’d have to self-isolate when she landed in Perth in late March. After spending two weeks in remote Tasmania with no phone reception, she had no idea what was going on.
Trying (and failing) to sell a property. I wanted cash for shares in what I thought would become excellent buying conditions.
In late May, my mum’s lymphoma returned and I became her carer for four months until she passed away. Caring for and loving her through treatment was all-consuming. The grief that came after was overwhelming. I’m only emerging from what felt like a fog now.
Money and all things investing took a backseat for most of 2020. That’s the point of having enough of it to not have to think about it. It’s an incredible luxury for which I was grateful every day.
In November, when I was finally ready to look at money stuff again, I switched my super back from cash. I’d missed the rebound, but because I’d gotten in early in my switch, I had missed a lot of the drop too. Overall, March to November lost 12% of that nest egg. Thank goodness I’m not relying on it.
Here’s what my classic investing mistake, akin to panic-selling, reminded me of:

1. Buying shares means you’re voting for capitalism.

Just like I discussed with Matt from Aussie Firebug recently, the act of buying a share is saying you think capitalism will continue. Especially an exchange-traded fund (EFT) or listed investment company (LIC).
We buy and hold equities, ETFs and LICs because we want the companies we’re buying to grow. We hope they’ll share profits with us as dividends.
For both to happen, capitalism must continue.
In June 2021, it looks like COVID-19 hasn’t succeeded in throwing our economic model under the bus. I don’t know if global threats like climate change and pollution will do it either. I’m hoping we move to a ‘net positive gain’ model instead of the winner-takes-all approach we have now. Both options mean capitalism continues in some form.

Stocks are a vote for capitalism

If you think capitalism is going away, then you might not want to hold shares – ever.

2. ETFs and LICs are (almost) self-correcting.

We also buy parcels of companies via ETFs and LICs because they’re replicas of share market segments. Sometimes they mimic the whole share market.
Those that don’t cover the whole she-bang change their composition. The crappy holdings that don’t survive pandemics, technological change and other macro forces drop out. Managers sell them then buy other assets to replace them.
As investors, we don’t need to know which companies are being bought and sold – though it never hurts to be curious. We rely on fund managers to research and apply the agreed strategy. They act in our interest as shareholders.
Knee-jerk selling assumes you know more than those managers. That’s not to say amateurs and professionals alike didn’t foresee a need to move into lower risk options like cash and bonds in 2020. It’s just that it’s unlikely that individual amateur investors know better or more than professional managers.

3. Automation reduces human error.

I figured I’d be watching the share market for the rest of 2020. Every person and their dog was asking me ‘but what happens next? and I needed to have an answer.
I didn’t count on other more important work with Mum taking over. I missed the signal that would have seen me switch my super away from cash before June rather than November.
At university, chemical engineers learn that if there’s room for human error, you must assume 100% likelihood that error will happen. I set myself up for disaster by relying on something that could stuff up – specifically, me. Overconfidence in one’s own abilities is another classic mistake.

4. You have some control over your response – even to a market crash.

Panicking has served human beings well. Our crocodile brain does an excellent job of getting us away from sabre-tooth tigers …but it doesn’t help much when it comes to investing. 
Feeling the panic is normal and healthy. How you choose to respond to that panic is up to you. I’m not saying markets are rational – I’m saying we can choose a rational response. That’s the underlying premise of civilisation, right? We don’t have to succumb to our instincts and club a perceived threat to death immediately.
You don’t have to let that panic guide your decisions.

Douglas Adams said it best in Hitchhiker’s Guide to the Galaxy


The caveats

I can preach ‘stick to your guns, don’t panic!’ because I am in the luxurious position of being financially independent. A market drop won’t starve me.
That’s not the case for everyone.
There are times when a bit of reaction might serve you well, or at least help you sleep better:

1. When you’re close to retirement.

If you’ve read my book, you’ll be familiar with the story of Luis. He watched 50% of his superannuation balance disappear with the Global Financial Crisis (GFC). He did not have time to let it regain its losses before drawing it down in retirement. The last 14 years have not been as easy as Luis thought they’d be in early 2007.
Had Luis switched to cash in the first month or two of the GFC, he’d have been in a much better position in his retirement.
That’s why advisors tend to recommend moving towards investments with lower returns and less risk as you approach retirement. They don’t want to see you lose all your gains due to unlucky timing.

2. When you won’t sleep well worrying about a market crash.

It’s all very well for me to say ‘don’t give in to that panic!’
It’s another thing to close your eyes at night and not be consumed by sleep-depriving stress. Such stress drops your IQ, which leads to poor decision making. Myriad ill-effects flow on from there.
If you know you can’t relax with your money at risk in an unusual circumstance, it may be worth going conservative to ease the stress that comes with worry about a market crash. I think we can agree COVID-19 is not usual. Approaching it differently to other corrections and recessions might be considered reasonable. 

Sometimes, you’re just unlucky.

I don’t regret switching my super to cash. Not having to think about it was fabulous while I was busy elsewhere. Given I’m three decades away from drawing down my end-of-life retirement fund, I can wear that loss. But, I’ll be less likely to switch when the next unknown arrives.
We’re all different. Listen to your feelings and your thoughts to decide what’s best for you.

Why I don’t beat myself up over this knee-jerk reaction and neither should you.

Sofia Loren was right:
Mistakes are part of the dues one pays for a full life.
We’re all going to mess up with our money several times. We’ll sell shares *just before* they receive compelling takeover offers and the share price shoots up (hat tip to Milton owners). We’ll buy absolute dog investments that turn us off entire asset classes for life. We’ll overspend, under-plan, ignore common sense.
Welcome to being human!
With each mistake, you’ll get better. Hopefully you won’t repeat the avoidable errors.
And sometimes, time is not on your side. Bad luck happens to good people. It’s not your fault, any more than it’s Luis’ fault that the GFC took half his super. You can’t predict the future.

Damned crystal balls – they never seem to work!


…and why I’m not worried about a market crash anymore.

COVID-19 looked like an economy breaker to me. It may still turn out to be. We won’t know for many years what the impact of so much stimulus paired with such low interest rates will be.
But I’ve lived through the unknown now. After a 30-year run of growth, that’s what a big market drop feels like: the unknown.
Regardless, my faith in capitalism as a shaping force is back. Whatever happens, I reckon human self-interest and all that implies will prevent the entire system going to pot. It’s a cynical view, and a depressing one when you think about our environment, but there you have it.
More crashes will come. Dalio and Burry may turn out to be right about the next market crash being huge and imminent.

That’s the thing about news – it’s designed to get your attention

But then again, maybe the next crash won’t be huge. Maybe it’s not imminent. For every bear, you’ll find a bull crying ‘Boom times are coming!’ I’ll take time in the market over timing the market, thank you. With a big, fat buffer fund, diversified assets, and the ability to return to work if there’s a job going, there’s a good chance I’ll weather most financial storms. Sure, I might come out a bit rough and ready on the other side. But that’s the fun bit: you never know!
I hope you can put aside your market crash worries too.



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