The risk of turning up late to the party

The risk of turning up late to the party


By Alister Pirie, AFA

Based on my experience as a Financial Adviser over the past 31 years, financial advice firms usually receive strong inflows of funds leading into a market correction or crash. Many potential investors sit on the side-line watching equity markets rise during accommodative market conditions and buy late in the cycle for fear of missing out on the rally. By doing so they buy at or near the top of the cycle with the risk of taking the full impact of a market correction. These investors also tend to be the ones that panic and cut their losses at the bottom of the market cycle, a typical example of “Greed & Fear”.

Market corrections are a normal function of the investment cycle and have, in the past, retraced back to their previous all-time highs over time as demonstrated during the most recent major stock market corrections.

1987- (Black Monday – 19/10/87)

The US Dow Jones Index experienced a drop of 508 points (22.6%), the largest one-day percentage drop in history. Every one of 23 major world markets experienced a decline during October 1987 when measured in US dollar terms, ranging from 20 to 40%. The NZ index of the day dropped by over 30.0%. It took two years to top the levels seen before the decline on 19th October 1987 but a lot longer for the NZ index.

2000 – 2002 (Dot-com bubble)

The dot-com crash lasted from March 2000 to October 2002. This was caused by two primary factors; the use of metrics that ignored cash flow, and the fact that many analysts focused on aspects of individual businesses that had nothing to do with how they generated revenue or their cash flow. It took more than seven years for the US S&P 500 index to recover to the level before the dot-com bubble burst in 2000.

Global Financial Crisis (GFC) – 2007-08

The GFC was a severe worldwide economic crisis and considered to be the worst since the great depression of the 1930s. It took nearly six years for the US S&P 500 index to recover to its previous all-time highs and has since continued to post record gains.

Equity investing is a “long game” which rewards brave investors who stay invested and make regular contributions and/or lump sums to their investment portfolios in all market conditions. Don’t be late to the party or succumb to investor behaviours of greed and fear. Talk to the team at Saturn Advice. We’re here to help.

The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate personalised financial advice from a qualified Authorised Financial Adviser to suit your individual circumstances.