What To Do During a Market Downturn

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The last couple of days, even weeks, have not been a pleasant ride at all. The Corona virus outbreak has impacted the financial market. Supply chains got interrupted due to factories being closed. Big companies like Apple and Microsoft have already announced that their first quarter results will be impacted. Oil is down drastically as well because of demand plunging. Russia and Saudi Arabia have started a price war as well. A recession could be the next step. Some of you will probably have questions. Should I sell? Should I do something different? Is there reason to panic? In this post, I will tell you about my plans going forward!

Investing horizon

I’m still pretty young at the moment. My investing career just started and I still have at least 30 years to go. When I started investing I knew markets don’t just go up all the time. Market downturns or recessions are likely to occur a couple of times over a 30-40 year time frame. Given that I still have a lot of years to go I am not concerned at the moment. I rather have this happen at the start of my career than a couple of years down the road. This will probably be a good lesson. I don’t have a very big amount invested at the moment so it won’t be a very costly one.

My plans

My plans going forward are simple and easy. Stick to my own rules and keep buying every month. I am thinking about one small change though. I would like to invest even more now that prices are cheaper, with a probability to go even lower over the next couple of weeks/months. The money has to come from somewhere if I want to invest more of course. Since I still want to save the same amount of cash, I’m thinking about cutting back my monthly investment into P2P Lending. The stock market has proven itself in the last 100+ years. P2P Lending could be riskier in a recession. This is why I maybe want to lower my exposure to it, while at the same time buy more stocks at cheaper prices. You will be able to see more details about my decision at the end of the month in my monthly portfolio update.

Moral of the story. If you are a passive long term investor like me, just keep buying every paycheck! Set yourself some rules and stick to them!

2008

Since I wasn’t investing myself during the 2008 financial crisis, I went ahead and took a look at the charts. Every recession is, of course, different but this could serve as a decent example. I took the S&P 500 as a benchmark to check some numbers.

As you can see on the chart, the S&P hit a high in October of 2007. Over the course of around 1,5 years, US stocks had lost 57% of their value. In total it would take almost 2000 days (more than 5 years) to hit the same highs again. Let’s assume that we started investing in US equities at the start of 2007, right before the crisis hit. If we would have kept making monthly investments it would not take nearly as much time to be break-even again.

This back-test assumes 700€ in monthly contributions to VTI (vanguard total US market ETF). As you can see, the unrealized gains of the portfolio went negative around the end of 2007/start of 2008. We would have been break-even around the start of 2010. This is a lot sooner than the S&P itself which took until 2013 to be back at previous highs. I know 2 years is still quite some time. But If you take your whole 30-40 year investing career into account, 2 years is nothing. Staying strong mentally is the hardest part of investing. This is also another reason why I made the blog. I hope that, with writing about it, I won’t have weak hands myself and sell during a possible market bottom.

Have I missed anything? Do you have any question? Don’t hesitate to ask them in the comments below!

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8 thoughts on “What To Do During a Market Downturn”

  1. Long time supporter, and thought I’d drop a comment.

    Your wordpress site is very sleek – hope you don’t mind me asking what theme you’re using?
    (and don’t mind if I steal it? :P)

    I just launched my site –also built in wordpress like yours– but the theme slows (!) the site down quite a bit.

    In case you have a minute, you can find it by searching
    for “royal cbd” on Google (would appreciate any feedback) – it’s still in the works.

    Keep up the good work– and hope you all take care of yourself during the coronavirus scare!

    1. Hello Justin,

      Thank you for the kind comment. The theme I’m using is called Neve. I have taken a look at your website and, although I have no clue what you are selling, I really like the design. Keep up the work you are doing and I wish you all the best in these special times!
      If you have any more questions don’t hesitate to get in contact!

      Michiel

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