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Prepare now for a future market crash

History suggests another market bust is inevitable. Perks Private Wealth Director Simon Wotherspoon discusses how to prepare and survive it.

Nov 29, 2021, updated Feb 24, 2022
Image: Unsplash

Image: Unsplash

Before Black Monday in 1987, stock market crashes were rare enough to avoid living memory. Now they occur often enough for all investors, non-investors, business owners, workers, unemployed; to recall their own memories of how a ‘market crash’ impacted their livelihood or plans.

Perks Private Wealth Director Simon Wotherspoon says market volatility is an expected part of investing, whether allocating money in shares or property.

“Statistically, there’s only a ten per cent chance of a thirty per cent share price drop in any year. More positively, the chance of not having such a drop is ninety per cent,” Wotherspoon says.

“So, if you invest for 20 to 30 years, a market crash is almost guaranteed.”

“No-one can be certain when or what will cause the next market crash but preparing is crucial to ensure a healthy long-term investment portfolio.”

Wotherspoon says you must take four key steps:

  1. Prepare intellectually
  2. Prepare emotionally
  3. Prepare financially
  4. Access financial advice and coaching.

By accepting the previous odds, you’ll have taken that first step.

The second step is not so straightforward. 

Understanding the statistics one thing, it’s quite another to apply them once natural human emotion and instincts kick in,” Wotherspoon says.

“Everyone thinks they can buy low and sell high… but it’s a different story when you’re living it.”

Psychological risk tolerance assessments can help to emotionally prepare investors when losses appear to be looming.

In leading wealth advisory firms like Perks, Wotherspoon says these should form the foundation process in welcoming a new client.

“These assessments help evaluate how receptive a person is to ideas about risk, and their ability to cope emotionally with the stress that volatility and uncertainty cause along the investment journey,” he says.

“The assessment should help identify an investor’s risk tolerance so a match can be found with their specific portfolio objectives.”

Such an understanding is key to identifying the most suitable asset allocation to ensure an investor can calmly stay the course through all market cycles. After all, history shows markets always recover for investors with the fortitude to endure them, Wotherspoon says.

Step three is financial preparation: ensuring your investments are structured so you won’t feel backed into a corner during market crashes. This is especially crucial for investors in or approaching retirement.

Wotherspoon says one strategy used by the team at Perks Private Wealth is a ‘three-tier approach’.

“Broadly, this means – hold enough funds in short-term liquid investments, like cash, to provide one year’s income. Then have enough fixed interest or capital stable reserves to support another one to four years of income. With the rest, growth assets could be chosen in such a way to meet your risk tolerance.”

This approach, says Wotherspoon, ensures an investor has the financial means to exercise the patient courage necessary to ride out a prolonged market crash. It may even allow them to take advantage of the situation.

The final step he recommends in preparing for market crashes is to get financial advice and coaching.

“While you may be able to manage your money entirely on your own wits, an experienced financial adviser offers an experienced sounding board. Their wide view on the issues amid market tension can be quicker to pick up on any subtle differences applying this time,” Wotherspoon says.

Working with a well-supported and credentialed adviser works in two ways. First, as a circuit breaker, giving you time between your initial panic and eventual decision.

Secondly and most importantly, you’ll be more confident your wealth isn’t being swayed by emotion. Decisions are instead supported by material research, rigorous standards and an objective view on your personal financial goals.”

Research by investment company Vanguard argues that abandoning a well-planned investment strategy can cost an investor dearly, while behavioural coaching maximises returns.

Analysis by the company indicates coaching can add around 3 per cent to actual (net) annual returns for investors.

Wotherspoon reiterates that staying calm under pressure is the most important aspect of dealing with the market.

Periods of market volatility simply present opportunities for patient, long-term investors,” he says. 

Such inevitable cyclical events are historically the time when quality assets pass from weak hands to the strong.”

Disclaimer: Any information provided in this article is either purely factual in nature or is general advice only and does not take into account your personal objectives, situation or needs. Consider the relevant information memorandum and obtain financial, tax and legal advice before making any decision on a financial product.

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