☏ +34 93 665 85 96  |  ✑ info@spectrum-ifa.com

Investing After a Stock Market Crash

By Chris Burke - Topics: investment diversification, Investment Risk, Investments, Spain, Stock Markets
This article is published on: 25th May 2020

The question on any investor’s lips at the moment is, ‘Will the stock markets crash again in the near future, say in the next 6 months?’ The main reason for this question is, even if the world starts to get back to normal after this pandemic, when furloughing and all the other methods that have helped people economically are finished, soon we shall see the realisation of the following:

  • Profound job losses and companies going out of business
  • Some entire sectors (e.g. aviation) taking years to recover, some even never recovering
  • Company results being published for the 2nd quarter of 2020, when they have been effectively shut the whole time. How will the markets react?
  • Unemployment at an all-time high
  • People losing their homes, unable to obtain mortgages

What’s really unclear here is, and this is the BIGGEST question, has all of this already been priced in to the stock markets? That is to say, have all these considerations and more been valued and taken into account by people buying and selling stocks?

50% of the reason why stock markets go up or down has nothing to do with the actual value of those stocks; it’s the perception of the people buying and selling that influences it. If people are optimistic and there is some bad news, the markets might not be affected by this. However, if people are worried/pessimistic and there is some small bad news, this could be ‘the straw that breaks the camel’s back’ sending the markets tumbling. So, what is the best approach to take when investing after a stock market crash?

upward stockmarket trends

The answer to this question depends on your risk/reward profile. If you are a more aggressive investor, then using all your allocated investment money in one go would probably be your choice. However, this equates for less than 20% of us; the most common approach

of people investing their money is balanced.

Most people understand that not being invested means you could miss out if the markets shoot up, but also, if they crash lower you would lose out. However, if you believe yourself to be aligned with the following criteria, then there is a strategy you can follow which statistically should give you more safety, with a lower chance of your money being negatively impacted at the beginning:

  • You are prepared for your money to be invested for the medium to long term (5 years plus)
  • You do not want access to this money for at least 5 years
  • You understand there could be some volatility during this period
  • You want your money to grow above inflation and actually increase in its value
  • You are a balanced investor, meaning you are prepared to invest with the knowledge that the value of your money will go down, as well as up

After every stock market crash, analysts try to label what kind of a recovery it is. Is it a ‘U’ shaped recovery, meaning a sharp drop, period of downturn and then a sharp upward recovery? Or is it a ‘W’, where there is a crash, then a recovery, then another crash followed again by a recovery? The truth is, each stock market crash is different; no two are the same. Each day it’s 50/50 whether the markets will be up or down. Therefore, taking this reasoning into focus, and wanting to limit any losses and maximise any gains, let’s look at this as if it’s a business opportunity.

If you were opening up a new business, and needed to borrow money to finance it, would you either:

  • Borrow all the money you needed in one go and spend it
  • Borrow some of the money you needed, review periodically and then borrow more as and when necessary
  • Borrow some of the money you needed, review periodically and have instant access to more when necessary

Whilst Option 1 could work for you, that money needs to have interest repaid on it, and if the business didn’t go well, that’s more money lost.

Option 2, as long as you don’t have any cash flow issues, could also work well, meaning you are repaying less money and only borrowing what you need as and when. If anything happened to the business you were not putting everything in.

Option 3 gives you the same as option 2, as well as having access to a cash injection instantly should the time arise.

crystal ball David Hattersley

These options are all a matter of opinion, but in relation to investing, there is no future knowledge of what the stock markets will do. What we do know for certain about investing is this:

  • Historically, inflation has doubled approximately every 24 years
  • Unless your money is keeping up with inflation, in real terms you are reducing the value of your money
  • There is hardly any interest being paid by bank accounts
  • One day you will stop working, and the only income you will have is what you have built up

Therefore, taking into account these main known points, it’s clear that money needs to be managed effectively but in a risk averse way as possible. To be able to minimise risk, and to try and gain on any stock market rises and minimise any falls, the safest short-term approach would be to ‘drip feed’ your investments. However, to make sure you don’t miss out on any upswings in the market, you need to have your investment money aligned in the following way:

Example – Investment value €250,000:
Starting with €50,000, add to this €20,000 per month moving forward until one of the following occurs:

  • You have invested all your money
  • There is a large enough stock market downturn

In this second scenario, you would then decide to add much more of your uninvested money immediately; depending on how much is left and the scale of the market drop.

By using this approach, if markets took a sudden upward turn your money is already partially invested to take advantage of any gains moving forward. However, and more importantly, if the stock markets took a sudden dive, you are limiting losses and are in a position where you can take advantage of lower prices.

financial review

As I stated above, no one knows exactly what will happen or when after a stock market crash, but by investing in tranches to make your money grow, this will give you some protection against a stock market crash in the near future, and even the ability to even take advantage of it.

Two last points I would add, and those are, even if stock markets crash again, after a recent previous crash, there is more likely of a quicker bounce back. And secondly, money invested over time is the safest way to achieve long term growth of your money and create that income for when that day finally comes when you are no longer working.

My job is to help people plan their finances, managing their money in as painless and risk-averse approach as possible, at all times having their best interests as our common goal. Don’t hesitate to contact me on the details below if you would like to discuss any of the points in this article or arrange a meeting with me.

Article by Chris Burke

Chris BurkeIf you are based in the Barcelona/Costa Brava area and would like to have an initial, complimentary face to face video call or arrange a time to visit Chris in his office in central Barcelona, contact Chris on chris.burke@spectrum-ifa.com or whatsapp +34 689915730. If you are based in another area within Europe, please complete the form below and we will put a local adviser in touch with you.

Contact Chris Burke direct about: "Investing After a Stock Market Crash"

The Spectrum IFA Group is committed to building long term client relationships. This form collects your name and contact details so we can contact you about this specific enquiry. For further information, please see our Privacy Policy.
 
If you are in the Barcelona/Costa Brava area

Click here to contact
Chris Burke
If you are based elsewhere

Click here to contact
The Spectrum IFA Group