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September 18, 2020 at 04:05 PM
Aside from the cause of the most recent market crash being the COVID-19 pandemic, the crash was pretty similar to prior crashes in most other ways and, once again, those advisors and investors who have stayed the course with their portfolios will likely be rewarded in the end, according to presenters at Morningstar’s virtual annual conference, which took place Wednesday and Thursday.
To combat the influx of terrible news around the pandemic, “act more like an institutional investor,” Larry Siegel, director of research at the CFA Institute Research Foundation, said during the on-demand session “What Prior Market Crashes Teach Us About This One.”
“The stock market is the only store where, when there’s a sale, everybody runs out of the store,” he noted, adding: “What you should do is run into the store and buy more. If things start to get expensive, buy less or maybe even sell. But the biggest lesson from institutional investing — and I did it for 15 years directly at the Ford Foundation — is don’t just do something; stand there. We’re Americans and we tend to think ‘don’t just stand there; do something.’ We spring into action whenever there’s a problem.”
However, “if you act more like a long-term investor [and] stay the course and don’t react to every blip in the market — whether it’s up or down or large or small,” you will be much better off, according to Siegel.
The Sky Isn’t Falling
“There’s a lot of talk going around that the world is coming to an end and we’re all going to die,” he said, but he pointed out people have talked like this since biblical times.
The fact of the matter is that, after downturns, pandemics, wars and even depressions are over, “we recover and move to new highs” all the time, he noted. Despite often negative news, “we’re making a lot of steady, slow progress that’s harder to discern,” he said.
He conceded that “when the market’s down 34% in a few weeks, it’s tempting to think ‘I’m going to cut my losses now because if it’s down another 34%, I’m broke and I’ll never recover’ — and it is possible that the market could fall that much more.”
History, however, tells us that “you’re almost always wrong to cut your losses at that point.”
The key word there being “almost.” After all, “there was one time when you should have” cut your losses early on, he said, pointing to the Great Depression, from 1929 to 1932. “We had a crash in ’29, a crash in ’30, a crash in 1931, a crash in 1932,” he noted.
At its bottom in 1932, the Dow Jones Industrial Average was only at about 41, he pointed out. (For the sake of comparison, the Dow was at more than 27,000 Friday afternoon.)
