Market Plunges – an Investing Rite of Passage

5 investing biases

You never forget your first share market plunge.

It was August 1997 and there I was, a mere few months in my new role as a Para-Planner (the term for a Financial Planner in training) with the private client arm of one of the world’s largest accounting firms.

As is typical of many twenty-something year olds with a finance degree, I rated my ability as an up-and-coming share market wiz highly. I had already built up a small portfolio of direct shareholdings in what could best be described as ‘speculative’ positions, with plans to add newbie miners, biotechnology startups and the fledgling “World Wide Web” enabled tech sector.

No boring ‘old-world’ companies for me. It was the Nineties, and global share markets were on an absolute tear, having completely expunged the memory of the 1987 market plunge a little over a decade before. The very hottest of these global markets were the countries of the “Asian economic miracle”, incorporating the so-called ‘tiger economies’ of Indonesia, Thailand, South Korea,  Malaysia, the Philippines and Hong Kong.

As part of my role I would regularly have to make the short walk to the imposing 101 Collins Street, where both the bank and the broking firm many of our clients utilised were located. I looked forward to these outings, for nothing else than it allowed me to glance at the large ASX screen located at the southern end of the foyer as I headed for the elevators.

This was the Nineties. Most days the board was a sea of green, signifying ever rising share prices, with only the occasional red, falling share price, to sour what was otherwise one of the strongest bull market runs since the 1970s.

The overall trend was in one direction and one direction only; Up, Up, UP!! You simply couldn’t help make money. It really was all too easy.  Until it wasn’t.

Economic and Financial Market Meltdown

No one knows for sure what triggered the collapse of August 1997. Some lay the blame at currency speculators. Others at ill-conceived measures by policymakers that allowed things to spiral out of control. 

Frankly, it matters not. What I do remember, as clearly as if it had occurred yesterday, was walking into the foyer of 101 Collins on a cold August 1997 afternoon and being confronted by a sight I simply hadn’t even considered possible, let alone one that was occurring right before my eyes.

The ASX board was a sea of red, from top to bottom, left to right. Every company, from the Big Australian to the smallest minnow, was in free-fall, a response to a financial crisis that was rapidly unfolding in the Asian region and spreading, as a financial pandemic does, into markets in the US, Europe and now Australia.

I stood slack-jawed for a moment, staring in disbelief at the carnage in front of me, the rational part of my brain struggling to process what my eyes were taking in, while its primeval counterpart screamed “Sell Everything and Head for the Hills!!!” as my fight or flight response kicked in.

After what seemed like eternity, but was probably no more than a minute, I gathered myself and proceeded to the lift bank to continue with my workday.

In the weeks and months that followed, what has now come to be known as the Asian Financial Crisis wreaked devastation on global financial markets. Hong Kong’s main share market index fell an insane 23% in 3 trading days in October, while Thailand’s share market plunged 75% from its pre-crisis levels prior to beginning its recovery.  Here the All Ordinaries Index weathered July 1997, but then fell some 5% in August, had a brief respite before plunging 10.4% in October.

You never forget your first market meltdown when your own money is on the line.

Whether it was 22 days ago, 22 months or, as in my case, over 22 years ago, the memory of fear and dread during your first big plunge will be with you long after the markets have recovered and proceeded to new highs. If the current coronavirus-led market correction is your first, welcome to the club.

Neuroscientists now call this indelible ink-mark left by key life events The Peak-End Effect. We remember the most vivid events (and how they conclude) the clearest, and seeing a chunk of your hard-earned wealth disappear seemingly overnight is, by any definition, a vivid event.

Never Let a Crisis Go To Waste

I subscribe to the view that a crisis delivers not just pain, but an opportunity for reflection, learning and growth. In that sense the Asian Financial Crisis was, for me, the beginning of my education into what it takes to be a lifelong investor. Starting with abandoning my prior belief, firmly held until then, that I was a genius short-term speculator.

Most of my minnow ‘sure bets’ prior to August 1997 didn’t see it through the Asian Financial Crisis, but the broader Aussie share market did, and other asset classes positively thrived amidst the chaos. And so I learned about the benefits of diversification; having a portfolio so widely held that it would withstand whatever the market gods would throw at it.

Let’s face it. Diversification comes to the fore in exactly these times, because it allows you to survive in order to fight another day. This lesson from 1997 paid handsomely a decade later as the Global Financial Crisis hit. A retrospective I conducted in 2014 on how diversified portfolios actually performed through the teeth of the GFC clarified to me the central importance of diversification in long-term investing.

The second key lesson is that time in the market beats timing the market. Always.

Letting Time Do The Heavy Lifting

Good things come to those who wait.. out the occasional bump in the road to financial security.

In June of 1997, the All Ordinaries Accumulation Index (i.e. with dividends counted) stood at 11,433.6.

From that point it was battered by the Asian Financial Crisis, smacked about by a smaller Russian-led crisis a year later, pummeled by the Dot-Com bust of 2000, left punch-drunk by the GFC of 2007-09 and king hit by a US budget deficit crisis of 2011; all before the latest coronavirus scare.

And yet $50,000 invested in June of 1997 would have grown to over $250,000 as at the end of February. But here’s the thing.

To get that $250,000 you would have had to have sat on your hands during all the aforementioned market panics. This while experiencing one negative month in every three on average (clustered together in short-bursts of pain such as the current decline).

It was once said that the only things that can derail a long-term equity investor from success are expenses and emotions.

We’ve done our level best to shield you from the former. With the latter however we can only do so much. If this is your Asian Financial Crisis, welcome. It may be your first, but I guarantee it won’t be your last. Just know that, as with 1997, this too shall pass.


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