Who’s afraid of a market crash?

Who’s afraid of a market crash?

Recent news and the US S&P 500 reaching record highs have certainly increased the number of market experts warning of an imminent global crash. So should investors heed the calls of the growing army of Chicken Little’s and rush to cash or are their predictions a false alarm? Our Financial Adviser Chris Kelly elaborates.

In Australia, where the emphasis on building investments and superannuation for retirement, we are largely individual investors. As such then, one of the first issues with the propagation of fear mongering in the media is the potential for enormous harm on the returns of those planning for their future! How often do investors read such warnings and decide that, to be safe, they should reduce their exposure to the market? Some pull out entirely.

It happens far too frequently! I have reviewed a number of portfolios that converted entirely into cash in late 2008 or early 2009 and whose owners have been unable to bring themselves back into the share market since. Even though share markets have experienced a relatively consistent rise since the Global Financial Crisis (GFC), these investors feel they have missed the recovery because of continual warnings that stock prices are “high and vulnerable”.

To drive home the cost of missed opportunities, the graph below shows the bull market run and the returns of the US market since 2009 to now.


Though it shows that there have been occasions in the recovery when the market has fallen back, looking at year-on-year returns, the market has been flat or positive. The overall result has been a handsome return for investors that invested in the US equity market in 2009 and stayed there!

Coming back to the nay-sayers, I agree that there are always a number of risks present in the world and as such, there are always lots of reasons why the market could fall. It all makes for good fear mongering material and our newspapers sell well because of it!

Feeding this are any number of media pundits predicting the next crash in order to enhance their “expert” credentials. If their prophecy is fulfilled, they can look forward to an invite to a myriad of paid speaking events, at least until the next crash! However, as it turns out, the number of experts actually making the correct call on the market is almost as scarce as hen’s teeth!

Regardless of the accuracy of their predictions, the high household cash positions and large cash holdings in Self-Managed Funds would suggest that a good number of investors are afraid to get back in stocks.

Peter Lynch, the great stock manager and regarded by many as a credentialed market expert, once commented that he stopped reading market stories over the weekend, because it prevented him from buying stocks and making good investment decisions on Monday morning. So, if a market expert can be deviated from his sound strategy by market noise in the media, what hope has the average investor?

Will the market fall? Well, the answer is “eventually”.

Markets have always had a time when they rise and when they fall. It is the nature of running a business and thus, since share investing involves taking part ownership in a business, it is implied that the same risks in running a business are inherited by share investor!

How do we manage that risk if you are not comfortable with the potential for a fall? Well, even without a crystal ball there are a number of approaches, utilising various portfolio diversification strategies that can help a “well advised” investor navigate the choppy waters of investment.

For those who would prefer the safety of cash, the lack of real income from your savings means that you are going to need to lower your retirement expectations or work for a lot longer. Otherwise it is very unlikely your savings will last as long as you will!

Whilst cash may be perceived as risk free because it will avoid the potential of a market fall, a long term cash holding only results in missed opportunities and a very conservative (read, small) retirement  saving balance. Now is as good a time as any to explore the alternatives to cash savings and how your financial position can be boosted with strategies designed to help you meet your lifestyle objectives.

Not sure how to invest? Are you an emotional investor who jumps in and out of the market and would like some coaching and guidance? Chris can help you set your target and work with you to manage your investing. Call our office on 02 9633 5530 or contact us for an obligation-free chat with Chris.


Please note this information is general advice only. Please seek advice before acting on any information in this article.

Sacha Loutkovsky
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