Is This Market Crash Different?

March 23, 2020

Markets are crashing, and the media is screaming that this time is different. But is this market crash different? Should you be selling your investments?

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Markets are crashing, and the media is screaming that this time is different. But is this market crash different?
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The stock market is crashing, and people are panic selling while the news screams “This time is different!”. Is this market crash different? Yes and no. I’d like to share my thoughts about investing (during this crash and in general), and what I believe we should do. But first:

Two important notes:

  1. I am not an investment professional, nor do I have powers to predict the future (no one does). I’m simply a person heavily interested in personal finance who feels I have valuable perspectives to share. I make informed decisions based on historical events because as Tim McCabe states “History may not repeat, but it does rhyme”
  2. I’m not going to talk much about COVID-19. While the global situation has worsened, I already wrote that article and said what I wanted to say. I have a family member awaiting a flight home from a heavily affected region, I’ve been personally swabbed for the virus (awaiting results), and I work in health care. Needless to say, I understand the fear people are feeling. It’s uplifting to see people distancing themselves in the fight against an invisible enemy, but it remains an incredibly stressful time. In this article I want to focus on money since that is the topic of this blog, and I feel the financial threat we’re facing could be equally terrifying.

I’d also like to clarify an important detail about who this article is written for: I’m speaking to investors that mainly invest in stock market matching index funds.

If you invest in individual stocks I consider it more akin to gambling. Yes, you can “win big” but you can also lose all your money if that company goes out of business.

When you invest in an index fund (depending on which) you are investing in the top performing companies. If one falls, another takes it’s place at the table. It’s a brutal but self-cleansing process, and by investing in it you’re getting a share of the upside.

This article is going to focus on index investors for two reasons:

  1. That’s what I personally do, so it’s the area I most understand.
  2. We’re talking about a crashing stock market, not a crashing individual company. Since index funds track the market not individual companies, they’re a fair representation collectively.

So, how is Mr. Market doing?

It’s not pretty. As of today (03/23/2020) the S&P 500 is closing at 2213, a painful 35% fall compared to the 3386 high on 02/19/2020. On paper, we’ve lost 35% of our investments and that doesn’t feel wonderful.

On March 19th I read an article in Macleans stating that this market collapse is unlike anything we’ve seen. They shared this graph of the collapse as a visual:

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The graph shows stock values as a percentage compared to their previous highs. The red line is the current COVID-19 crash. Also represented are the 2008 Great Recession, the collapse of the dot-com bubble, Black Monday in 1987, the 1981 recession, the oil shock of 1973 and the 1929 stock market crash. Really good times (not).

When I first looked at it, the severe red plummet made me think “Ah sh*t”. It’s hard to see that free fall and not worry about your money. As a percentage of the markets previous high, it’s the fastest plummet we have seen. Am I panic selling in this bear market? Definitely not. Let’s talk about why.

What is a bear market?

A bear market is defined as a drop in securities prices by 20% or more. Since 1926 there have been 16 bear markets if you use the S&P 500 index. This means on average a bear market occurs every 6 years, and typically we see a drop of almost 40%. Some bear markets are less severe while others are terrifying (like the ~50% drop in 2008). Regardless of whether they act like a koala or a grizzly, all market drops of 20%+ are a bear market.

If you think about the 6 year average, we were overdue for a crash (as everyone has been predicting for years). It was the longest bull market we’ve had, and many people made mega bucks investing since the 2008 crash (from the bottom of the 2008 crash to this years high the market increased ~400%!!).

So why not just cash out at the high?

I often see this question asked on forums: wouldn’t I have more money if I sold when markets were at their highest and then re-purchased at the bottom of the crash?

Absolutely! So how are you going to predict that? I’m not a betting woman, but I suspect if you had the power to predict both moments perfectly you’d be sipping cocktails on your private island, not asking Reddit for advice.

The truth of it is NO ONE can time the market. Yes, that even includes the professionals that act like they can. Occasionally people will guess right; even a broken clock is right twice a day. Market crashes are in response to unpredictable events; how do you predict the timing of the unpredictable?

In 2008, the market starting dropping. We were “due” for a correction and there was an explosion of media reports screaming that the next crash was here. Many people panicked and sold. Within a few months the market recovered without ever reaching the 20% bear market territory. Those people who cashed out had to buy back into the market as prices increased.

Analyzed a different way, what if you’d left your money in the market in 2018? At the end of September 2018 (right before the correction) the S&P 500 was at a high of 2930. At the top of this pre-COVID-19 crash, shares were worth ~16% more after accounting for the just shy of 20% tumble they took at the end of 2018. If you just leave your investments alone, they go up over time.

Is this market crash different?

There’s no ignoring that this market crash has been swift and severe. Do I think we’re at the bottom? No. Do I think markets will recover? Yes.

Take another look at the Maclean’s graph I shared above. There’s good news hidden in there. Do you know why the graph was extended for 33 months? Because in all those crashes, that’s the longest it took for the market to begin recovering!

33 months from the day 1 of each crash was the LONGEST it took to hit bottom. It has always gone up over time.

Is this market crash different than every other crash in history? As one of my personal favourite financial writers JL Collins recently said, by definition every crash has to feel “like it’s something major, something different, and something terrifying”. Otherwise there would not be a crash, and people wouldn’t be panic selling. Humans aren’t nearly as scared of predictable things as we are of the unpredictable.

If you live in an area with hurricanes, you should expect hurricanes. If you invest in the stock market, you should expect bear markets.

With stocks, “losing money” is unfortunately part of the game. Fortunately, making money is a bigger part.

If you invest in stocks, you should expect to see your account balances plummet sometimes. Does that make it less scary when you’re in it? Not necessarily. Should you anticipate the occurrence and honestly decide for yourself PRIOR to a crash if you have the stomach for it? Yes.

I disagree with those financial writers stating people shouldn’t feel scared. I think fear is normal (plus lets be honest- how many times has someone saying “don’t be scared” actually worked?). You’ve likely watched your accounts drop, and it feels unpleasant. I’ve experienced that myself lately. It’s ok to feel scared, but how you handle that fear answers whether you should be in the stock market at all.

I’m scared of heights, so it’s hilarious that I’m a rock climber. Does the fear mean I shouldn’t climb? Not in my opinion. I work through those fears and know reaching the summit feels worth the mental anguish I felt getting there.

I’d say the same about the stock market. Knowing my investments will be way higher in 10 years than they were when I invested them makes the occasional crash worth it. Only you can answer whether it’s worth it to you.

On that note I’d like to clear up a major misconception about investing:

You haven’t lost any money unless you sell.

Many people talk about how much money they’ve lost in this crash, but it’s just on paper if you hold steady and don’t sell. That’s why when I discuss my 5 digit losses I put “lost” in quotation marks.

Think about it this way:

Say you own three pairs of shoes that were worth $100 when you bought them, and the price drops to $65. How many pairs of shoes do you now own?


The value went down, but you still own the same three pairs of shoes.

Let’s give simple numbers for the same comparison. Let’s say you buy a share of the index fund for $100. Next year it drops to $65 a share. How many shares do you own? Still the same one; the value just temporarily dropped.

Luckily, when you invest in index funds you’re not buying an item that could lose all it’s value like a shoe.

Stocks aren’t just pieces of paper! You’re buying shares in the best performing business out there. Do you really want to bet against ALL businesses?

To again quote JL Collins:

“What is the worst possible performance a bad stock can deliver? It can lose 100% of it’s value and have it’s stock price drop to zero. Then, of course, it disappears never to be heard from again”

What about the other side though? What’s the best a stock can do? It’s profits could go up 50, 100, 1000% or more. There is no ceiling for growth. That’s the power of index investing! As some companies fail, others more than make up for their profits and take their place in the index. This is why ultimately the market always goes up.

This COVID-19 outbreak will definitely hurt some companies. Some will fail and close. On the flip side, some companies will flourish and grow. This will change the market of course, but ultimately it always goes up.

So what do I think you should do during this market crash?

Nothing. We haven’t changed our approach at all, and we continue to invest the same amount as before knowing right now we’re likely getting shares on sale. I don’t know when, but I fully expect the market will continue it’s relentless climb upwards.

Don’t sell your investments and realize the loss; just sit tight. If you’ve realized you can’t handle the stress of market crashes, that’s valuable information to have about yourself. Wait until things recover, then move your money to less volatile investments.

My suggestion: Stop watching the market reports. Don’t look at your investments for now. Take care of your family and connect with people you love (even if it’s via Skype). Try to control financial aspects that are actually within your control such as your spending. Let the market do what it does.

If you need a bit more reassurance, check out this guided meditation for when the stock market is dropping. I initially thought it was a joke, but it actually ended up being very calming! Highly recommend.

For a list of all posts I’ve written, look here!

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