I started investing in 1986-87, aged 18. Though my early investment approach was largely random, I kept making money. Then came the brutal stock market crash of October 1987.
My four stock market crashes
On Black Monday (19 October 1987), the S&P 500 collapsed by 20.5%. I was stunned, as I’d never imagined that the US index could plunge more than a fifth in 24 hours. Yet I recall the index ended 1987 in positive territory.
After surviving my first major market meltdown, it was 12 years before the next big crash arrived. Between March 2000 and October 2002, the tech-heavy Nasdaq Composite index lost 78% of its value. This ‘dotcom bust’ sent its market value plunging from $6.7trn to $1.6trn, before it finally bounced back.
Stock market crash #3 was the global financial crisis (GFC) of 2007-09. During this market meltdown, it felt like capitalism itself was close to collapse. On 11 October 2007, the S&P 500 peaked at 1,576.09 points. On 6 March 2009, the index bottomed out at 666 (the biblical ‘Number of the Beast’). That’s a slump of 57.7%.
My latest market crisis came in spring 2020, as Covid-19 swept the world. On 19 February 2020, the S&P 500 index peaked at 3,393.52 points. On 23 March 2020, it bottomed out at 2,191.86. That’s a crash of 35.4% in under five weeks.
Four lessons from market meltdowns
1. Time heals all wounds
Having first invested in shares 37 years ago, one thing I’ve learnt is what matters most long term is time in the market, not timing the market. Despite these four major (and many minor) market meltdowns, the S&P 500 has gone from roughly 233 points to 4,129.17 during my adulthood.
That’s an increase of around 1,672%, or just below 8.1% a year (excluding cash dividends). I’d happily take that gain for the next 37 years (but I’m unlikely to live to 92).
2. Greed ruins markets
One old City saying warns: “Markets climb a wall of worry”. Yet during periodic bull markets, fear goes out of the window, crowded out by greed and irrational exuberance. What shocked me most during the dotcom years wasn’t the 2000-03 bust, but the insane bubble of 1995 to 2000.
By then, my strategy was mostly based on value investing. Hence, while inexperienced investors speculated on grossly inflated Internet-related stocks, I stuck to buying boring FTSE 100 firms. As a result, 2002 was one of my best years on record, as I tripled my portfolio’s value in under 12 months.
3. Buy when it’s bloody
Famed investor Nathan Rothschild once remarked: “Buy when there’s blood in the streets, even if it is your own”. During 2000-03 and 2007-09, I took heed of his wise words and bought shares in solid businesses at knockdown prices. Today, these ‘bloody’ trades look fantastic in hindsight.
4. Cash is sometimes king
At the end of 2019, I warned my wife that I felt the US stock market was too bubbly. She promptly moved half of our family portfolio into cash. Within days of 23 March 2020 — the bottom of the Covid-19 crash — this 50% cash was reinvested back into deeply discounted US stocks. And this one contrarian decision was perhaps the best of my long investing career!
