The upside of a market downturn

Most people view share market downturns as unequivocally bad events. Suddenly, hard earned savings aren’t worth as much as they were yesterday. It seems as if our money is evaporating, and in the heat of the moment selling up can look like the best course of action.

The alternative view

But on the opposite side of each share sale is a buyer who thinks that they are getting a bargain. Instead of getting 10 shares to the dollar yesterday, they might pick up 12 or 15 to the dollar today. When the market recovers, the bargain hunters can book a tidy profit.

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

A range of natural and man made events can trigger market selloffs:

  • Terrorist attacks.
  • Infectious disease outbreaks such as SARS and COVID-19.
  • Wars, the possibility of war, and geopolitical issues such as threats to oil supplies.
  • Economic upheavals, the bursting of speculative investment bubbles, and market ‘corrections’.

In short, anything that is likely to reduce the ability of a broad range of companies to make money is likely to trigger a market sell off.

The common thread that runs through the causes of downturns is uncertainty. 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.

However, the initial drop in market value occurred 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. After the initial sell off it took the ASX200 Accumulation Index just 36 days to completely recover from 9/11.

Other downturns and recoveries take longer. The Global Financial Crisis began in October 2007, and it wasn’t until nearly six years later that the ASX200 Accumulation Index 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.

If? Or when?

Of course much hinges on whether or not markets recover. 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.

Seek advice

Of course, it’s only natural for investors to be concerned about market downturns, but it’s crucial not to panic and sell at the worst possible time. The fact is that downturns are a regular feature of share markets. However, they are unpredictable, so it’s a good idea to keep some cash in reserve, to be able to make the most of the opportunities that arise whenever the share market does go on sale.

For advice on how to avoid the pitfalls and reap the benefits offered by market selloffs, talk to your financial adviser.

General Advice Disclaimer

This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

Paradigm Strategic Planning Pty Ltd is an Authorised Representative of Sentry Advice Pty Ltd AFSL 227748

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