What exactly happens when there's a stock market crash?

 

What is a market crash?

Nothing good, of course. You don't hope for one and the economy definitely doesn't - however, it's not the end of the world which we will explain.

A stock market crash is characterized by a sharp drop in share prices across numerous sectors, resulting in widespread panic among investors. This amplifies the intensity of the crash.

Historically, notable crashes include the Wall Street Crash of 1929 leading to the Great Depression, Black Monday in 1987 with its 22% drop in the Dow Jones, the 2008 Financial Crisis causing a global recession, and most recently, the market plunge during the COVID-19 pandemic in 2020.

While easiest to follow the crowd as our emotions consume us in times like these, we like to refer back to a quote by the great Warren Buffet who has applied a contrarian view during time of busts with plenty of success.

 

"I am greedy when others are fearful and fearful when others are greedy" - Warren Buffet

 

 

Why does the market crash?

Market crashes typically result from a blend of external events and your classic, human errors. When prominent indices such as the S&P 500, Dow Jones, and NASDAQ take a sharp downturn it sparks panic. Reasons for these declines can be diverse - war, geopolitical tensions, interest rates, inflation, earning reports, and bursting of bubbles.

 

Market bubbles occur when an asset becomes so popular that herd mentality and the fear of missing out bids prices up well above its intrinsic value. One of best examples of this happened in 17th century Netherlands, when popularity for the bulbous flower got so out of hand that a single tulip bulb was worth more a house.

 

 

So why invest at all?

With the reality that crashes happen, why would you invest at all? Consider the S&P 500 comprised of the 500 largest US companies: 25 down years from 1922 - 2022, despite this the index has returned on average over 10% per year since inception. In order to have achieved those returns you had to stomach the bad with the good. In the crash of 2008 the S&P 500 fell 38.5%, no fun but the following years produced returns of 23.5% and 12.8%, respectively. Volatility is a reality of investing.

 

One of our many objectives is to limit market volatility for our clients by investing with sense over emotions.

 

 

What to do when the market goes down?

So history has shown it's more of a when and a how big rather than an if. There are strategies that have proven effective over our years of experience to counter these fluctuations.

 

1. Plan & invest in quality - As Benjamin Franklin stated, "if you fail to plan, you are planning to fail." Your strategy should consider your goals, time horizon, risk tolerance for starters. Regardless of your profile, quality holdings can help weather the market turbulence and reward you in the long-run.

 

2. Avoid panic selling - Avoid the emotional selling as markets fall, panic selling has proven time and time again to be strategy that losses you money. Instead, view downturns as opportunities to buy undervalued stocks. As Peter Lochead says, “When the market is down, it means good companies are on sale.”

 

3. Time in the market over timing the market - Timing the market perfectly is challenging as involves getting two things right, the entry and the exit. History has proven missing the best days is detrimental, from 1993-2021 missing the best 30 days resulted in returns of only +233% compared to +1835% when full invested in the S&P 500.

 

4. Maintain Perspective - If your objective is to grow your wealth for the future, don't get caught up on the day to day fluctuations.

 

5. Dollar Cost Average and Consistency - At One London Group, we implement dollar cost averaging. When dealing with a lump sum, we layer the purchases over time minimizing timing risk and smoothing out volatility. As an investor, you can actively do this with deposit plans, a plan to consistently invest monthly, quarterly, or annually growing your wealth by unleashing the power of compounding.

 

We are committed to equip our clients with strategies to navigate market challenges confidently.

 

 

Disclaimer: CIBC Private Wealth consists of services provided by CIBC and certain of its subsidiaries, including CIBC Wood Gundy, a division of CIBC World Markets Inc. The CIBC logo and “CIBC Private Wealth” are trademarks of CIBC, used under license. “Wood Gundy” is a registered trademark of CIBC World Markets Inc. This information, including any opinion, is based on various sources believed to be reliable, but its accuracy cannot be guaranteed and is subject to change. CIBC and CIBC World Markets Inc., their affiliates, directors, officers and employees may buy, sell, or hold a position in securities of a company mentioned herein, its affiliates or subsidiaries, and may also perform financial advisory services, investment banking or other services for, or have lending or other credit relationships with the same. CIBC World Markets Inc. and its representatives will receive sales commissions and/or a spread between bid and ask prices if you purchase, sell or hold the securities referred to above. © CIBC World Markets Inc. 2023.