What to do when the share market is crashing

Ben Brett 22 June 2022

Part of investing means riding the roller coaster of returns. This has its ups but of course also comes with its downs. During down periods, I’ll usually talk to my clients about their portfolios and tend to get similar questions.

I thought it might be helpful to compile these into a blog post for future reference.

QUESTION 1: Should I move my money to cash?

This is the number one question I get when markets go down. Generally, the answer to this question is “no”.

One of my favourite sayings is “Investing is like a roller coaster and the only people who get hurt on a roller coaster are the ones that get off early”.

If you’ve invested with a long-term view, then a downward movement in your investment should be expected as part of the investment cycle.

If you move your money to cash after markets drop (particularly with a large drop), all you are doing is locking in those losses. Whereas if you continue to remain invested, you’ll still be invested when markets inevitably climb again.

QUESTION 2: Should I stop investing or slow down investing during this period?

Markets go up and down regularly and no one can really predict when these things will occur. For this reason, I’m a big fan of “dollar cost averaging”.

Dollar cost averaging is where you contribute to your investment consistently (preferably at least every month) in both good markets and bad markets. The idea is that you invest when times are good (at a more expensive price), and when times are bad (at a less expensive price) and overall, your returns even out to match the performance of the stock market.

If however you stop contributing whilst the markets are down, you will only be buying shares whilst they are expensive meaning your returns will be significantly less than the market average.

QUESTION 3: I’ve been through crashes before but this feels different- is it?

Every time the share market goes backwards, there is always that feeling in the pit of your stomach telling you that this time it’s different.

There will always be a reason why this time it’s different. But since the share market came into existence, there has never been a time historically where the market has dropped and not returned to the same level only to go on to new all-time highs.

QUESTION 4: Why can’t I just put my money in cash at the top of the market and then buy in when it bottoms out?

This is one of my favourite questions because this one seems so logical. Why not simply move your money to cash at the top of the market and then reinvest when the market hits the bottom?

Many investors before you have tried this, and some have succeeded. But more have failed.

Picking the top and bottom of a market is incredibly difficult. Your gut will tell you that you can do it but the best investment minds in the world can’t do it.

The best way to think about this is the share market has historically delivered between a 7%-10% return (approximately) over the long-term. If you’d been invested for this period, you would have received this amount.

If however you tried to time the market and got it wrong, you would have significantly less. Is it worth the gamble?


QUESTION 5: Can I lose all my money?

When you purchase a share, you are purchasing part-ownership in a company.

As an owner, if that company went out of business, you would likely lose your money. This is why diversification is so important.

A good investment fund has hundreds of different companies across various sectors, countries and perhaps even property, bonds and other financial instruments for good mix.

This level of diversification means that your likelihood of losing all your money is basically nil (provided the world economy doesn’t implode).

People who tell you they lost “all their money” are generally exaggerating and/or have made poor investment decisions that lacked diversification.

QUESTION 6: What if I need access to my money when the market is down?

If markets go backwards and you’ve got a long-term investment timeline, then you can wait for the market to go back up. But what if you’re about to retire or need access to the money now?

Preferably leading into retirement you’ll be looking to move some of your investment into lower risk investments or to cash but if you haven’t done so, it’s not the end of the world.

The best practice is to simply withdraw what you need and leave the remaining amount still invested.

It can be tempting when you retire to move all of your money to low risk/growth investments but remember your retirement may last 30 years! If you leave the remaining invested, it’s likely by the time you come to access the money, the market will have changed.

This however does highlight that it’s worth looking at your plan as a whole and when times are good, taking some action to move some of your money to cash or lower risk/growth investments.

QUESTION 7: How long will this last?

Looking to the S&P500 (as at June 2022):

    • there have been 28 bear market since 1928 with an average decline of 35.62%
    • On average, this has taken approximately 13 months to go from peak to trough and then another 27 months to get back to breakeven
    • This is approximately 3.3 years to complete the full cycle

Now these are historical averages (and only for US stocks) and nobody really knows how long a bear market will last but this does give you some indication of how quickly these things can turn around.

 QUESTION 8: Is there a benefit to when markets go down?

For anyone who is investing regularly and not looking to access your money in the short-term, a downturn in the market can be the best thing that ever happened to you.

This is the time when ‘stocks go on sale’ meaning you are able to buy the same investments you were paying top dollar for not that long ago.

Again looking to the S&P500, since 1950, the average return after a year from the closing of a bear market is 23.9%. After the 2020 Covid drop, the markets had increased a whopping 59% after one year!

This means that all the money that you continue to dollar cost average into your investment portfolio during this time will have an outsized effect on your final return.

As Warren Buffet famously said “be greedy when others are being fearful”.

QUESTION 9: What if I can’t stand it anymore?

If after educating yourself as much as possible, you still want to make a change, then you certainly can. Just be aware that you are potentially locking in some large losses and you may regret it.

If you’re having trouble sleeping at night, perhaps consider only moving a small amount of your investment to cash (rather than the whole lot). This may make you feel better without having to move the whole portfolio.

If you are deeply concerned and do stick it out, the next time the market goes up, make sure you adjust your plan to suit your individual risk tolerance.

As always, we are here to help at Bounce Financial so please reach out if you have any questions or are interested in receiving financial advice. 

About the author: Ben Brett

Ben Brett owns and operates Bounce Financial with his wife, Cara. Having started his career as a Corporate Lawyer, Ben has always had a passion for helping make the complex things simple. Follow Ben on LinkedIn at www.linkedin.com/in/ben-brett/