If you invest in the stock market with a long term strategy like me, you probably put your money in ETFs with a global and national coverage. I’ve been investing for almost two years now and I’m experiencing my first real crash! If you are in the same situation as me, you have probably asked yourself the following question:
What should I do during a stock market crisis? Should I sell everything? Should I hold on and wait? Should I invest even more?
Famous thinker from Fribourg
I did ask myself this question, and I had a few subscribers who wrote to me to see what I thought. They all had the right answer, but it was also their first crash 🙂 I totally understand these fears and indeed, when you look at the charts of your favorite ETFs, you have to have a good heart… Here are two examples with my favorite ETFs, VT and CHSPI.
Performance of my favorite ETFs
This incredible ETF has a disastrous performance of -13% since the beginning of the year. For the information, I bought my first VT share around $96.00 at the time… I don’t need to tell you that I’m well into the negative on this position.
My Swiss ETF doesn’t save the day and doesn’t make me smile either with its year-to-date performance of -11.4%.
Impact on the wallet and the mind
In my case, I still have a small portfolio of just over 22,000 CHF, so my heart is still in the right place. Even if I am not happy to open Interactive Broker and see a global loss of about 1’500.-CHF, these are still small amounts. Our well-known Mr Mustachian Post wrote a post recently in which he said he had suffered a loss of 45,000 CHF!
Our reaction to these amounts is different for each of us. I think it depends very much on the income we have. For some people, CHF 1,500 is a very large amount of money in relation to their income, whereas for others who are very wealthy, even CHF 45,000 is not much. So it depends on your financial situation.
When I opened my Interactive Broker account one morning and saw this drop, I took a deep breath and remembered what I had read and learned before investing in the stock market.
But what is a stock market crisis?
This is a very good question. There is actually no formal rule to describe what a stock market crisis or crash is. For me, it’s when all the world’s markets get slapped in the face at the same time. The VT ETF is a very good example, as it is a World ETF composed of 9’433 companies at the time of writing. In my opinion, if such an ETF (or any other stock) loses ten percent of its value, it is a crisis.
In the context of my beloved VT, it went from a value of $108 (on 4 January 2022) to $88 (on 11 May 2022), a loss of 18.6%! For me, this is a good example of a crisis, as such volatility is not “normal” on this ETF. Still on the same ETF, at the beginning of the health crisis, at the end of February 2022, the value of the stock was $83 (14.02.20) and fell to $56 (20.03.20), i.e. a loss of 32.44% in a few dozen days!
In short, I think you understand what is meant by crisis or crash in the stock market world.
My investment strategy during a stock market crisis
There are some important points to remember so that you don’t panic and know how to react when faced with such a situation:
- Don’t sell anything! This is the first information to be assimilated and applied. No one on this earth is capable of predicting crises with certainty, and even less so when the market will begin its real recovery.
- You invest regularly! If, like me, you invest the same amount each month in your favourite ETF, then you keep it up!
- Crisis are normal! The past proves it to us, it is cyclical, but impossible to predict. Remember the spectacular crises (dotcom, subprime, wars of all kinds or the COVID-19). The market recovers, and often more quickly than it went down.
If you have an aggressive risk profile and the financial and psychological capacity, you can also see this crisis as an opportunity to invest at a reduced price. In other words, you can take advantage of the crisis to buy more than usual!
Conclusion
On my blog, I don’t do trading, but long-term investing. As my investment strategy follows a long term logic (> 10 years), I can afford to adopt the course of action described above. Of course, this may not apply to all cases and not to all crises. An investor who does not rely on ETFs and/or does not have a long-term strategy would probably not have this approach.
I believe in this approach because it has been tested and explained by many people, like you and me. As an investor, you know that there is no such thing as zero risk, but it is imperative that you define your strategy and the course of action from the beginning. All crises are different and no one can predict the future.
What about you? How do you live this crisis and do you change your investment strategy during these periods?
