Why You Shouldn’t Panic About the Market Crash

Beautiful one day, perfect the next…

You’ll recognise this catchy slogan instantly. It creates an idyllic image of paradise. And it’s been luring southerners to Queensland since the 1980s.

I remember an early version of this long running campaign. The promoters did something I’d never seen before — they backed the tagline with a promise.

The details are now a blur. But it was along the lines of a ‘no rain’ guarantee. In the event of the heavens opening, holidaymakers would get financial compensation.

Now, giving a guarantee on the weather is a bold call. Clear skies can quickly fill with dark clouds. So it’s no surprise that this part of the campaign didn’t stand the test of time.

Sure, Queensland has some of the country’s best weather. The warm sunny winter days are the envy of many. They act as a magnet for the sun deprived.

But nothing is ‘perfect’ all the time.

As you know, Queensland also plays hosts to some of the wildest weather. Fierce storms and tropical cyclones are seasonal regulars. It’s all part of life in the Sunshine State.

But no matter how gloomy it gets, the sun always returns. It’s all part of the cycle.

The cycle of the stock market

The stock market follows a similar pattern. Just as grey skies follow blue, rising prices give way to corrections. This continual ebb and flow has been in play for centuries.

While the recent sell-off is notable, it needs to be put in context.

You see, big declines are not a rarity. In fact, they occur more often than many people recall.

Have a look at the following table. It shows the Dow’s history of corrections since 1900.

MoneyMorning 26-10-18

Source: www.investing.covestor.com
[Click to open new window]

And this doesn’t include the drops of 5–10% that don’t qualify as corrections. According to research on forbes.com, there’ve been 77 of these mini sell-offs since 1946.

Now check this out:

MoneyMorning 26-10-18

Source: www.macrotrends.net
[Click to open new window]

You’re looking at Dow Jones over the last 104 years. The big sweeping uptrends are easy to spot — they dominate the chart. A handful of corrections also stand out.

But do you notice all the 10%, 15% and 20% corrections?

Probably not. They quickly fade into the background of the longer-term advance.

And what about the drops of less than 10%?

Well, you’d need keen eyesight to spot these fake outs.

While a sharp fall might seem serious at the time, many of them quickly dim from memory.

For instance, do you vividly recall the turmoil during Europe’s 2011 debt crisis? Or the plunge in 2015 on fears about China’s economy? Odds are, the current decline will prove just as unmemorable.

The Dow’s recent low is at 24,583, or 8.4% below October’s peak. As it stands, this is merely a sharp pullback — it won’t officially become a ‘correction’ unless stocks fall a further 438 points.

No one knows how long the current volatility will last, or where the ultimate low will be. Despite all the expert predictions, the final low will only become clear in hindsight.

But you can be sure of this: the sell-off will pass — just like they always have.

If you’re on the hunt for some profitable plays, check out Sam Volkering’s free report with four stocks he believes could be top performers in 2018 here.

The markets will always recover

Well, it’s actually very simple: follow your trading plan, not the headlines.

The thing I love most about system trading is the consistency. That’s because algorithms have no biases. They don’t care what the cheerleaders or doomsayers think.

During my 20s, I spent a lot of time reading opinions. I had a particular liking for two market forecasters. Both were of the view that a huge crash was coming.

As is often the case, this period had some big sell-offs. The merchants of doom would say each was the start of a total collapse. But it never was. The markets would always recover.

Have another look at the table you saw earlier. It’s normal to get a 10% correction every year. And it shouldn’t come as any great surprise if the market falls by 15–20%.

A GFC style collapse is another matter entirely. These are true rarities. Only twice in the last 100 years has the Dow lost more than 50%. The ‘end of the world’ is a low odds bet.

Sure, sharp pullbacks can be nerve racking. And they typically bring headlines of fear and gloom. Many people sell-up and leave the market altogether.

But remember, the worst case scenario is an outlier — it’s against the odds. Chances are this decline is more than halfway done. I also believe new highs are likely next year.

As I said, the key is to follow your plan. You might not know what the market will do next, but you know what you’ll do. This gives you more control than most.

And remember, Quant Trader has an exit point for each stock. This is a key part of the strategy — it’s a built-in safety net aimed at preserving capital for the inevitable recovery.

Good trading isn’t about perfect conditions. It’s about being able to follow a plan with consistency and discipline. That’s what separates the best traders from the rest.

Until next week,

Jason McIntosh,
Editor, Quant Trader

PS: If you manage your own money or simply want to learn the most effective strategies to both grow and protect your wealth, this free report is for you. Click here for details.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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