How to survive a market downturn – lessons to make investing less intimidating

When it comes to investing your money – your main goal is likely to grow and preserve your wealth.

When major market events cause the stock market to fluctuate, your immediate reaction may be to sell your investments and sit on the sidelines. But past market crashes and financial events have provided great learnings that can help you weather the next downturn.

Among these learnings, the best approach – diversify your investment portfolio and stay invested. While there is a long list of market crashes and events that have caused the stock market to fluctuate in the last century, in this article we provide examples of recent events and the different takeaways each provided.

COVID-19 Pandemic

In March 2020, as COVID-19 infections were accelerating globally, countries around the world instituted lockdowns, effectively shutting down their economies. The anticipation of a global recession, and the uncertainty of an unknown virus spreading exponentially, led markets to sell off sharply. The MSCI World index, a gauge of global stocks, dropped 34% from its February 19 peak to its March 23 trough.

The speed of the stock market downturn, and subsequent recovery, distinguishes the COVID-19 market event from past market crashes. In the United States, the S&P 500 recovered to its February 2020 peak in under six months, the fastest-ever rebound for a major bear market (when a market experiences prolonged price declines - Opens in a new window ).

Aggressive government interventions (such as offering support packages for businesses and individuals), the relative resilience of financial infrastructure and a virtual world where technology companies benefitted, all contributed to the sharp bounce-back.

2008 Global Financial Crisis

In 2008, banks and investment firms were over-exposed to mortgages granted to individuals with poor credit scores (known as subprime mortgages). While many institutions were not directly involved in the issuing of this debt, they invested in an array of these subprime mortgages.

When these subprime mortgages began to default, and the housing market collapsed, banks and investment firms were exposed to significant losses. This threatened the global financial system and made access to short term liquidity (the ease with which an asset, or security, can be converted into ready cash without affecting its market price - Opens in a new window ) difficult, forcing governments and authorities to intervene with support packages to rescue financial institutions. Poor regulation and supervision of the financial sector contributed to the sharp market decline.    

Out of major market events come major learnings

First, diversification is key. It is a basic principle to long term success and to weather volatility. It’s important to ensure your investments are diversified. Nobody can predict the future, so a well-diversified portfolio is essential. Spreading your investments globally across a wide variety of asset classes, including equities and fixed income, can help reduce your risk.

Another widely agreed upon lesson – stick with your plan and stay invested.

The COVID-19 crash and rebound was the fastest bear market recovery in history which highlighted the importance of staying invested and not selling investments around traumatic market events. Those who continued to stay invested during the pandemic are reaping the tremendous returns from the recovery of the market.