The Upside of a Market Downturn

By Quyen Quach, Bridge Private Wealth

Most people love it when share markets rise. Portfolios go up in value and people feel wealthier than they did the last time that they looked at their investments.

However when share markets fall, the opposite also rings true in the minds of many. Most people view share market falls as undeniably bad events. Seemingly overnight, your hard earned wealth is no longer looking as good as it was. Your portfolio is dropping rapidly and you decide that your plans for splurging on yourself or your family are probably not the wisest idea at this point in time.

Maybe the best thing right now is to cash up and sell?

The opposite side of the story

On the opposite side, there are some people who love it when share markets fall.

When we think about getting value for our money, we are inherently trained to go out and search for a bargain. We love buying something at a discount because we’ve managed to get more bang for our buck.

The share market can be no different.

In market down turns, companies are now on sale. They are discounted and you could be getting anywhere from 10% to 50% more shares than you could the days, weeks or months before.

For every seller there is a buyer who thinks that they are getting a bargain. When the market recovers, the bargain hunters can book a tidy profit or just continue to sit on their gains.

So why do share markets experience downturns, and what are the upsides?

There are many events that can trigger a market selloff, natural and man-made.

  • Infectious disease outbreaks such as COVID-19 as we have seen recently.
  • Wars, the possibility of war, and geopolitical issues such as threats to oil supplies such as what we are seeing in Ukraine and Russia.
  • Economic upheavals, the bursting of speculative investment bubbles, and market ‘corrections’.
  • Terrorist attacks.

When there is an increased likelihood that it is going to be more difficult for companies to make money, there is an increased chance of a market sell off.

In short, anything that creates a level of fear or uncertainty usually causes a downturn.

Initial drops in market value can occur quite rapidly. By the time many investors got out of the market the damage was already done. Paper losses were converted to real losses, and spooked investors were no longer in a position to benefit from the upswing.

In the immediate aftermath of the 9/11 attacks nobody knew what the size of the threat was and markets dropped. As the fear of further attacks receded, markets soon recovered. After the initial sell off it took the ASX200 just 36 days to completely recover from its fall.

Other downturns and recoveries can take longer.

The Global Financial Crisis began in October 2007, and it wasn’t until nearly six years later that the ASX200 recovered its lost ground. This caused real pain to investors who bought into the market at its pre-crash peak, but for anyone with cash to invest after the fall, this prolonged recovery represented years of bargain hunting opportunities.

When COVID-19 hit global markets, the ASX200 dropped 33% in one month. It look the market about 14 months to recover its losses. For those lucky enough to buy right at the bottom, they came away with a 48% gain over that period of time.

Will the market ever recover?

When we look at the history of share markets, the trend over time has always been up over the long term. While history isn’t always a reliable guide to the future it does reveal that, given time, major share market indices in stable countries usually do recover.

It’s also important to remember that shares generally produce both capital returns and dividend income. Reinvesting dividends back into a recovering market can be an effective way of boosting returns.

What should I do?

Of course, it’s only natural for investors to be concerned when the world is experiencing periods of fear, uncertainty and a market downturn.

Sometimes we need to step back and not panic and sell at the worst possible time. The fact is that downturns are a regular feature of share markets. Like many things in life, they can be unpredictable.

So what do we do? Well, it’s always a good idea to keep some cash in reserve or be in a position to access equity to make the most of the opportunities that arise whenever the share market does go on sale.

Who doesn’t love a bargain?

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