Last week, stocks tumbled a whopping 10% in a single day, bringing their total fall on Thursday to a terrifying 27% in the wake of Coronavirus. It rebounded slightly by Friday close, but we’re still in Bear territory.
If you’ve had the self-control not to check your investment portfolio, it’s time to continue on your merry way and stay logged out of your brokerage account. If you couldn’t resist the temptation to look, you may be in the throes of an anxiety attack watching months or years of investment contributions and returns erased in a matter of days.
What the hell happened?
Coronavirus killed the Bull market
All along we thought Coronavirus was a human respiratory infection but now it’s clear this virus is actually a deathly bovine flu. Too soon for jokes? We need humor to cope in hard times, let me have this. COVID 19 brought the world, and the stock market to a halt, erasing more than 3 years of returns in a single week.
No matter what your take on the severity of Coronavirus, the fact of the matter is this: the stock market has crashed because of it. Here’s why:
Disruption of international supply chains, particularly China
The global pandemic Coronavirus wreaked havoc quickly. Originating in China, the foundation of many US corporate giants’ supply chains, Coronavirus brought a global economy grinding to a screeching halt.
Initially, quarantine limited what travel and shipments came to and from the country. However, as days and weeks wore on, there was fewer and fewer staff to physically move goods from the factories. This created bottlenecks that can strangle supplies of certain goods overseas, including North American markets.
It’s impossible to sell a product you can’t manufacture or ship, so international businesses that relied on China’s expertise were left in a lurch. Stocks started to wobble, and the market increased in volatility, but the worst hadn’t hit yet.
Impacting a global workforce
COVID -19 made its way out of China despite best efforts to contain it. It’s now in more than 126 countries across the globe and infecting more than 200,000 people. If you want to track its impact across the globe, including your country, the Worldometers is an incredible site.
Large scale events and concerts were cancelled in an attempt to slow the spread of the virus. Many workplaces implemented work from home policies, while others sent employees and contractors home without pay.
As business slowed due to both labor and supply constraints, the stock market started to tumble under the strain. Once Trump grounded air travel to Europe, stocks crashed 10% in a single day. This brought the total stock market tumble to more than 25% down, erasing 2.5 years of gains. Our incredible historic 10-year bull market came to an abrupt and catastrophic end.
What does this stock market crash mean for your investments?
In the short term, a lot of pain. But I promise this is good in the long term.
Where you are in your investing journey will really determine exactly how this stock market crash feels for you. If you just started in the past 3 years, you suddenly have nothing but losses. If you’ve been investing for longer, you only saw the past couple of years of returns erased for you but are still up on your investments. Nevertheless, a crash like this can be bewildering. Here are some things you need to keep in mind.
The stock market was over-inflated and this needed to happen
One thing we didn’t talk about enough even it was happening is this: the stock market was reaching irrational heights. Stock prices didn’t even make sense for so many companies, and we saw P/E values in the multiples of hundreds. Surely whatever goes up must come down?
A stock market crash is the bubble popping, and what we end up with is securities that are more fairly valued. Sure, it’s hard to take the loss on existing investments, but it’s sure nice to be able to add new ones to your portfolio at prices that actually seem fair.
Crashes are normal events and part of investing
Even though we got used to the stock market going up year over year, that kind of growth is not sustainable. One of the risks you accept when investing in the stock market is that you will sometimes experience downturns. You just need the downturns to happen less frequently than the uptakes, and you’ll be ok.
Stick to your investment plan and take advantage of opportunities
Now is not the time to stop investing. In fact, it’s a great time to continue what you were doing! If you had regular contributions set up to your portfolio, continue making them. If you’re willing to accept the volatility and potentially some more down days ahead, you could even increase your contributions
Up until this point, some of the best-performing stocks were very expensive, at share prices of hundreds or even over a thousand dollars. If some of those companies have been on your wishlist for a while, now could be the time to add them to your portfolio at a discount. You know best your investment goals and risk tolerance and can assess what is the appropriate amount of risk you want to take right now.
Is a stock market crash a good time to invest?
If you didn’t have any investments in the stock market, congratulations! You didn’t lose any money in a historic crash. Instead, you get to begin when stock prices are low. What luck!
It might seem scary to begin investing when markets are so volatile, but I promise, it’s a great time to start! You can set up an account with a robo-advisor like Wealthsimple, and start contributing on a monthly basis. Your money will automatically be invested for you, and you can stay out of the chaos while still taking advantage of the opportunity.
If you were already invested and feeling the pain of your portfolio being down, it might seem crazy to add more. But if you can afford it, now is a great time to throw a little bit extra into your brokerage account.
But will I lose money?
Here’s the hard part: the stock market will continue to be volatile in the wake of COVID19. If we are entering a bear market, we may see stocks pushed down further. This means if you put money in right now, it’s possible it will go down in value before it goes back up.
The thing to remember is investing now is better than a few months or even a couple years ago. Even if your investment goes down a bit, we probably won’t see another 30% drop anytime in the near future. What we are more likely to see is some small dips before a climb back up. Are you willing to suffer some small percentage losses for long term gains? Then you’re ready to invest.
How does the stock market typically react to pandemics? Pretty well, actually
We can’t know how the Coronavirus stock market crash is going to pan out. But we do know how the stock market has performed in the past in response to global epidemics.
Don’t forget, you can take a breath
If the stress of COVID 19 and the stock market is too much, take a break! You don’t need to agonize about whether or not you need to jump in right now. The stock market will still be there next week or next month if you want to wait and let the dust settle before you jump in.
It’s impossible to time the market, so you shouldn’t try. But you should feel reassured that while we’ve been shown again that what goes up must come down, the next step is to watch what’s come down go up again.