Don't sell out, hold on in there.
The crisis today has many similarities with the Great Depression. We have forgotten our lessons from the past
THE past month must have been one of the toughest periods for investors and advisers. Equities markets collapsed like a pack of stacked cards. Many are saying the world has never seen anything like it before. But is this true? I took a quick trip back to 1929 to find out.
Real estate was the speculative favourite in 1920s America. The mantra was 'leverage up, buy a bigger house, even if you can't afford it'. Interest-only mortgages were already the standard. Then on black Monday, Oct 28, 1929, the stock market crashed.
Americans rushed to withdraw their money. Banks cut lending or closed their doors.
The economy collapsed. Greed, over-borrowing and bad loans led to the world's worst financial crisis - The Great Depression. Seeing similarities between the crises of 1929 and of today, I realised that when it comes to money, history tends to repeat itself. People are cyclical creatures who are generally greedy and cannot help but make the same mistakes.
The current plunge in stock markets has left investors so fearful that many have claimed this is the worst stock market crash in history. I wasn't sure, so I took another trip - all the way back to 1900. Looking at the top 10 stock market crashes since then, things became a lot clearer. The grand-daddy of all crashes was in 1930.
The market went down 86 per cent. Together with the 1929 crash, the Great Depression lasted 34 months and took 89 per cent from the market. The current crisis has brought the Dow down about 39 per cent so far. Although it is not the worst crash and the world has seen worse times than this, the question every investor is asking is whether today's crisis will be prolonged.
In my trip to 1929, I found out that just before Black Monday, everyone - from governments and experts to the newspapers - was bullish about the economy. Soon after the first crash on Oct 28, they quickly became positive again, predicting a quick recovery. Then on April 17, 1930, the market sank even further. Throughout the next two years there were plenty of recovery forecasts. But by the time the carnage was over, three years had passed. No one, not even financial experts or governments, knew how long the bear would last.
I also learned from the past century that no matter how deep and long crises were, markets always recover. The key question is whether you have time to wait for a recovery.
In the summer of 1929, John J Raskob, a senior executive of GM, claimed that US was on the verge of a tremendous industrial expansion. He maintained that by putting just US$15 a month into good common stocks, investors could expect their wealth to grow steadily to US$80,000 over the next 20 years. When the stock market crashed, Mr Raskob's advice was ridiculed and denounced for years to come. But was that fair? If one had followed Mr Raskob's advice and put US$15 a month into the market, after 20 years, the average annual return would have been 7.86 per cent, and after 30 years 12.72 per cent. Far from Mr Raskob's estimate, but not too bad, I must say.
The lesson is this: even in the worst crises, markets still recover with a respectable return. But if you want to shorten the time of your recovery, don't sell out. Keep investing but invest in the right things. If you sell, you are out of the game with no hope of recovery at all.
My trip to the past has taught me that all crises stem from the same cause - greed. Today's crisis is not new. It's just that we have forgotten our lessons. Don't try to time the markets. Michael J Mauboussin, chief investment strategist at Legg Mason Capital Management, found out that if you are able to accurately avoid the worst 50 days of the market, your returns jump to 18.2 per cent per annum. But if you miss the best 50 days, your returns dropped to a mere 1 per cent per annum.
Investors, be strong and courageous. You may be fearful. I am too. But history is behind us and for us. If you stop investing, you will perish. The crisis will surely pass. Don't ever give up.
The crisis today has many similarities with the Great Depression. We have forgotten our lessons from the past
THE past month must have been one of the toughest periods for investors and advisers. Equities markets collapsed like a pack of stacked cards. Many are saying the world has never seen anything like it before. But is this true? I took a quick trip back to 1929 to find out.
Real estate was the speculative favourite in 1920s America. The mantra was 'leverage up, buy a bigger house, even if you can't afford it'. Interest-only mortgages were already the standard. Then on black Monday, Oct 28, 1929, the stock market crashed.
Americans rushed to withdraw their money. Banks cut lending or closed their doors.
The economy collapsed. Greed, over-borrowing and bad loans led to the world's worst financial crisis - The Great Depression. Seeing similarities between the crises of 1929 and of today, I realised that when it comes to money, history tends to repeat itself. People are cyclical creatures who are generally greedy and cannot help but make the same mistakes.
The current plunge in stock markets has left investors so fearful that many have claimed this is the worst stock market crash in history. I wasn't sure, so I took another trip - all the way back to 1900. Looking at the top 10 stock market crashes since then, things became a lot clearer. The grand-daddy of all crashes was in 1930.
The market went down 86 per cent. Together with the 1929 crash, the Great Depression lasted 34 months and took 89 per cent from the market. The current crisis has brought the Dow down about 39 per cent so far. Although it is not the worst crash and the world has seen worse times than this, the question every investor is asking is whether today's crisis will be prolonged.
In my trip to 1929, I found out that just before Black Monday, everyone - from governments and experts to the newspapers - was bullish about the economy. Soon after the first crash on Oct 28, they quickly became positive again, predicting a quick recovery. Then on April 17, 1930, the market sank even further. Throughout the next two years there were plenty of recovery forecasts. But by the time the carnage was over, three years had passed. No one, not even financial experts or governments, knew how long the bear would last.
I also learned from the past century that no matter how deep and long crises were, markets always recover. The key question is whether you have time to wait for a recovery.
In the summer of 1929, John J Raskob, a senior executive of GM, claimed that US was on the verge of a tremendous industrial expansion. He maintained that by putting just US$15 a month into good common stocks, investors could expect their wealth to grow steadily to US$80,000 over the next 20 years. When the stock market crashed, Mr Raskob's advice was ridiculed and denounced for years to come. But was that fair? If one had followed Mr Raskob's advice and put US$15 a month into the market, after 20 years, the average annual return would have been 7.86 per cent, and after 30 years 12.72 per cent. Far from Mr Raskob's estimate, but not too bad, I must say.
The lesson is this: even in the worst crises, markets still recover with a respectable return. But if you want to shorten the time of your recovery, don't sell out. Keep investing but invest in the right things. If you sell, you are out of the game with no hope of recovery at all.
My trip to the past has taught me that all crises stem from the same cause - greed. Today's crisis is not new. It's just that we have forgotten our lessons. Don't try to time the markets. Michael J Mauboussin, chief investment strategist at Legg Mason Capital Management, found out that if you are able to accurately avoid the worst 50 days of the market, your returns jump to 18.2 per cent per annum. But if you miss the best 50 days, your returns dropped to a mere 1 per cent per annum.
Investors, be strong and courageous. You may be fearful. I am too. But history is behind us and for us. If you stop investing, you will perish. The crisis will surely pass. Don't ever give up.
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