Positive in sombre times

Those as long in the tooth as me will remember previous market crashes. You will recall that markets have always bounced back on other occasions, although not always that quickly.

In fact the long, slow 50 per cent fall in the FTSE 100 that began on December 31 1999 lasted 1,167 days.

I can remember investing in the middle of 2000 when I thought that markets had hit bottom and it was a buying opportunity

The market did not recover from the collapse that followed the investment madness of the first internet boom until March 2003.

I can remember investing in the middle of 2000 when I thought that markets had hit bottom and it was a buying opportunity. How wrong I was. I hung on to my funds for years, hoping to eventually make a profit. 

I never did because of the high fund management charges back then. It meant that even after the FTSE recovered to the level I had bought in at – which took around seven years – my funds were still around 40 per cent down.

That was simply because I had been charged 5 per cent every year.

Do not get me wrong, I am not complaining. I knew the risks and had only invested cash I had to spare. It meant I was happy to sit things out for the ride.

But I knew plenty of other people who got caught up in the stock market fever at the end of the 1990s. Many took risks they could not afford and ended up suffering losses that put them into financial difficulties.

I can still hear the voice of one friend telling me: “I need the money but I can’t afford to sell when the market is so low.”

He asked: “When will it recover so I can get my money back?”

I could not tell him when it would recover, although I had no idea it would take seven long years to reach the same level. But I could tell him that his money was gone. He had exchanged it for some shares, which were now worth a lot less.

Their actual value was not what he had paid for them, but how much someone was prepared to pay him for them.

“But that’s not fair,” he said. It is fair, and it is the basis for all trades and markets.

If you buy something to sell, you have to accept that there is a risk of not being able to find a buyer at the price you want. I tried to explain that to him but he did not really get it. He sold and vowed to stay away from stock markets.

I suspect he was not the only person who got burned back then who swore off investments. And that was a big shame. Seasoned investors expect the occasional knock-back.

Markets are driven by sentiment and that means they perform irrationally at times. But over the long term rewards can be made.

The always thoughtful Brian Dennehy of Fund Expert says: “Don’t predict the future – just control what you can control”.

In other words, make sure you have a mixed portfolio with, say, a 10 per cent stop-loss on any high-risk investments and a good chunk of your savings in cash, as much as 50 per cent, recommends Mr Dennehy.

He has long warned of a correction of 25-30 per cent in stock markets, but recently upgraded that to a risk of falls in the 55 per cent to 80 per cent range.

“That’s not a pleasant thought, but it’s not the end of the world,” he says. “It is essential to recognise the danger and figure out how to respond.”

Avoid complacency

He warns of complacency generated by a 40-year bull market when shares have always recovered, but he fears that stock markets are extremely vulnerable to a shock.

“If the outbreak of the spreading of the coronavirus is the shock, it is a massive wake-up call to investors and the financial industry and the media, a large proportion of whom have sleepwalked into the unfolding crisis,” he warns.

I cannot help but agree. But the difference I have noticed during this financial crisis is the response of ordinary savers and investors. I have had people buttonhole me in the pub with a cheeryish: “My pension’s lost 15 per cent.”

A colleague on a national newspaper updated me on the progress of his stocks and shares Isa, which had shown a 15 per cent gain a few short weeks ago. Now it is down more than 5 per cent.

The attitude in 2020 seems to be of resignation rather than anger. The current generation of investors lived through the financial crisis of 2008. They understand the nature of risk and accept it is a part of investment. And that is the positive that has come out of the current crisis, to my mind. 

We now have a section of the general public that is a lot more aware of financial matters. That does not mean that losses hurt less, but just that they will not run away and stash their cash under the bed instead.

No. Like markets, they will bounce back another day.

Simon Read is a freelance journalist