When I was making macroeconomic forecasts in 2007, a little over a year before the crisis hit in September 2008, one thing was obvious. Growth was going to slow down. How much by, was harder to predict.
It was even harder to convince anyone of it in those euphoric times. Similarly, when I wrote of the stock market crash in 2020 in early December, there was no sign of it actually happening. It was just a possibility in my mind and I couldn’t have imagined what would bring it about. Which, brings me to the first investing lesson:
#1. Expect the unexpected
In 2007, Nassim Nicholas Taleb wrote a book called The Black Swan, which became a hugely popular concept as the financial crisis occurred. Black Swan events, simply put, are unpredictable events that can make sweeping changes in our reality.
There’s a debate out there about whether the Covid-19 outbreak is indeed one such event. On school of thought believes it isn’t, because epidemics are rare but predictable. Another believes that it is, simply because it couldn’t be foreseen at the present time.
But without getting into that, the point I’m trying to make is that rare occurrences will come to test us. The lesson is to always expect them, preferably with these two questions. One, what’s my plan in the case of an unexpected crash? And two, what will I do if my investments hit a windfall?
#2. Always have an investing wish list
There are many stocks we’d like to invest in but haven’t because they were way too expensive. It just may not have seem like a rational investing decision to buy them at high prices. But in the case of a crash, some of these can become utterly affordable.
One such is the retailer Burberry, that I talk about in my other article today. Another one is last year’s best-performing stock in the FTSE 100 set, JD Sports Fashion, which I just bought because it’s now better priced.
#3. Stay focused on the goal in a stock market crash
But it’s easy to lose sight of our investing goals when there may be doomsday predictions in our midst. They add to the existing emotional disturbance brought on by the toll that coronavirus has taken on human life. At the same time, tying ourselves to our goals can provide the very tether we need to avoid confusion, stay productive, and keep growing.
As long-term investors, we might want to take stock of our strategy now that the equity market crash has altered our reality and possibly the fate of some companies whose shares we have invested in. We might want to change it altogether. In this case we draw up our investing wish-list once again after we have re-defined our strategy.
In a nutshell, it’s a good time to truly mull over our financial future, and the investing decisions we can take today that’ll help us get there. Let’s take the the potential for future stock market crashes into account when we do so.