How to survive a market crash: the lessons from history

How to survive a market crash: the lessons from history
Strategist, Ben Inker, the top investment strategist at Boston firm GMO, follows three of the simplest, most robust, and most easily accessible investment lessons from financial history. In a nutshell: Buy early. Buy often. And buy cheap.
Buying early means not sitting on your hands and waiting for the market to bottom out before investing. No, you won’t catch the lows. But you don’t have to. Last year that those who went into the 2007-09 crash sitting entirely in cash were typically still sitting entirely in cash long after it was over. Over time the trend of global equity returns has been positive — and significantly so. OK, so I’ve been cautious on markets — too cautious, really — for some time. And I remain distinctly edgy. A massive bear market remains a possibility. But I don’t know. And no one with an investment time horizon of more than about five years can afford to sit out of stocks completely. There’s a serious question of whether they should have less than 60% of their portfolio in equities. After all, you can make far more money in the stock market than you can lose, and those who hang on long enough generally do. Yeah, I know “dollar cost averaging” is the boring mantra repeated by every financial adviser in America But there’s a good reason for that. Even those who begin investing in stocks at the absolute worst moments have generally come out all right so long as they averaged their way in. That was true even in the massive crashes of 2007 to 2009 and 2000 to 2003. It was even true, remarkably, in the infamous Crash of ’29.
September 1929 was the absolute worst moment in history to invest in the stock market. The Dow Jones Industrial Average would fall almost 90% over the next three years — and would not get back to its 1929 level for two decades.

But someone who began investing at that moment would have been in profit as early as the start of 1934 — so long as they kept their nerve throughout the crisis, and kept investing monthly. Someone who began investing at the peak in March 2000 and kept going monthly was back in profit by the fall of 2003. Someone who did the same starting in October 2007, just before things began to fall apart, was back to evens in just two years. Their losses at the bottom were smaller, their payback times were much earlier, and their profits were much greater, than those who froze up.

The third lesson is to buy cheap.
That means being willing to invest where prices are lowest, and valuations are best — which usually means where markets have fallen furthest and seem the scariest. Sure, the Dow Jones Industrial Average is about 12% off its peak. But European “value” stocks, as measured by the MSCI Europe Value index are already in a full-blown bear market: They’re down more than 20% in U.S. dollar terms from the highs seen early last year. Value stocks are those that are cheapest in relation to their current net assets, profits and earnings. They’re typically in boring companies such as utilities or consumer-goods companies. They have, historically, been a better investment than their more expensive, and glamorous, “growth” rivals. And emerging-market “value” stocks, as measured by the MSCI Emerging Markets Value index, are down a thumping 40% from their 2011 peaks. How low are they going to go? According to Fact Set, stock markets in regions such as Latin America and non-Japan Asia are nearing their lowest levels of the millennium when measured on such valuation metrics as price to sales and price to earnings. Even Europe, while nowhere near as cheap as the fire-sale levels of the 2012 euro crisis, still looks pretty reasonable. Logically this is where bargain hunters will look first. Those who prefer an easier and calmer life should at least make sure they are getting exposure to more than just the Standard & Poor’s 500 stock index 2015.

That means buying international value and emerging markets value funds as well as — if not instead of the standard U.S. funds. Buy early. Buy often. And buy cheap. Or you can always follow your crystal ball instead.

Submitted by Christine Olivieri Donahue