If you want to build a portfolio and invest for retirement, should you buy more stocks during a financial crisis?

To many novice and professional investors alike, it sounds like a good idea. After all, stocks always go up higher in the long term, right? So buying stocks at a hugely discounted price seems to make total sense. But in practice, it is not so straightforward. I will explain to you why.

#1. You will miss the boat most of the time

2020 started the year with some interesting notes. With the deteriorating global economic data and increasing middle east tension, many “experts” are predicting that it is going to be the start of the next recession. Just google “2020 financial crisis” and you will see whole loads of articles about it.

But wait a minute, I’ve heard this every year since 5 years ago. If you google “2019 financial crisis”, there are tons of discussion too. And it has never materialized. Don’t get me wrong. I am not saying that a financial crisis will not happen, but if you are the one who has prepared “a lot of cash” and hoped to buy when the market was low, you would have missed 5 years of solid stock market returns.

The market is The Great Humiliator, as Ken Fisher refers to in his famous book “The Only Three Questions That Still Count”.  When you think that you are smarter or wiser than other investors, it always gives you a big blow.

#2. You will end up being the last buyer.

Stock investing is like playing musical chairs. In the beginning, there are more chairs and everybody is relaxed. But after a while when most of the chairs are taken, you will get nervous.

I talked about financial repression not long ago. This is when people are forced to purchase risky assets against their wishes due to the seemingly endless period of low-yield environment. If you want anything more than 4%, you have to move to riskier assets.

Probably you can tolerate this kind of low return for a while, but at some point in time, your faith in long term investing may fade and you will end up chasing what everybody else is chasing. Have you just invested or are you contemplating to buy the shares of Apple, Google or Visa? Are you still thinking about buying a private property or bitcoins? How about REITs, the best performing investment in Singapore?

To most people, if there is one thing which is more painful than losing money in the stock market, it is that you didn’t buy the best-performing stocks. – Ivan Guan

And that is the time you tell yourself, “I’ve got to do something”. And bang, you are the last buyer…

#3. You may not make money even if you buy stocks at the rock bottom.

Let’s say that you are really patient and a financial crisis finally comes as you wish. The price of the shares which you have been dreaming about dropped to half of the previous high. You are all set to make your greatest fortune.

There is good news and bad news for you. Let me share with you the good news first.

In the past, you could receive a minimum 178% return on average in 5 years post-financial crisis.

Sources: Ibbotson, Factset, FMRCo, Asset Allocation Research Team as of January 1, 2019

The bad news is that it is highly unlikely you will earn this return from your own investment.

Here’s what Fidelity found when they crunched the numbers on what would happen to a hypothetical $10,000 investment into an S&P 500 index fund from 1980 to 2018 if you missed the best few market days.

The point is, if you want to have the theoretical returns which everybody is talking about, you’ve got to time the market to perfection. You’ve got to be there during all the best performing market days! Would you be able to?

On the best days when the market is supposed to deliver the best return, you may be on a holiday, you may be welcoming a newborn, you may be stuck in the office and you may be too scared to click the “buy” button. There are thousands of reasons that you won’t have what the market could have delivered to you.

And even if, with all the luck and intelligence, you bought the stock at the rock bottom, are you certain that you would hold it for the next 5 years? Will you hold after you make 50% returns, are you sure that you won’t be worried? What if the stock drops again? What if the financial crisis is not over?

With hindsight, everything is easy. But having managed clients’ portfolio for more than a decade and discussing with thousands of clients and prospects, I’ve learned that being rational in investing is an almost impossible task.

#4. Buy a solid business and never sell – that is BS

People often quote what Warren Buffett said, “If you’re making a good investment in a stock, it shouldn’t bother you if they closed the stock market for five years”.

But you know the difference between Warren Buffett and you? If he loses all the money in any of his stocks, he is still a billionaire. But you are not.

When fund managers, stockbrokers and investing course providers tout about the ideology of buying stocks which you should hold forever, they are not talking about their own money. But when you are buying into this idea, you are putting your retirement funds at risk.

For most people, losing money in a “solid business” is not only financially damaging but detrimental to their whole wealth-building journey as well. It is a belief system collapse.

Very often, I meet investors who “got burned” in stock investing during the previous crisis. They actually did not lose a lot, but the whole experience makes them give up investing in stocks completely.

I also meet investors who have high convictions in their own holdings. These are usually people who just started a few years ago and ride through the bull market and had a very positive experience. They are “very sure” that they will never sell their stocks and will always buy more whenever there is a crash. I would say even if you keep your own promise, the market won’t be kind to you either.

Where is the pizza advertisement?

A few days ago, my daughter came to me because the school asked her to submit a picture of a cheese pizza. I told her, “That is easy, just pick up a pizza advertisement from the Straits Times.” (Yes, I still subscribe to the physical newspaper).

But after the whole family flipped the pile of newspapers upside down, we could not find any pizza advertisements. In fact, it seems that there are hardly any advertisements in the newspaper, unlike last time.

And it turned out I was right. It was just reported that Singapore Press Holdings’s net profit for the 1st quarter fell 17.2%. The article quoted “the decline was mainly due to lower newspaper print advertisement revenue”.

If we look at the stock chart of SPH, it tells the whole story. Did you buy the SPH shares (a solid business) during the 2008 Global Financial Crisis? If you did, how long will you continue to hold it?

Source: Google Finance

If you think this just happens to a few companies, you are deadly wrong. Many industries have changed upside down in the past decade, even the “disruptors” themselves are often disrupted as well.

Research shows that the average company lifespan on the S&P 500, the so-called “best” 500 companies in the world, is only about 15 years now. That means if you are investing in the long-term for retirement, you will see many of your “solid businesses” fail, right during your retirement years.

When you spend the next 10 to 15 years to build up some substantial holdings of ABC stocks in your retirement portfolio, a big chunk may just evaporate overnight.

It is not stock investing which doesn’t work, it is the strategy

If you follow my blog, you know I am not a big fan of “buy and hold” or so-called “value investing” strategies. The reasons are what I just talked about:

  • You will miss a lot of opportunities by trying to purchase stocks at a “discounted” price.
  • It requires precision to buy stocks when the crisis really happens.
  • It is hard to hold the stock even if you get it right.
  • You may be faithful to your stocks, but a once “solid business” may be replaced in the future.

Therefore, if you are investing for retirement, you’ve got to choose a strategy that is sustainable in the long run.

In the financial world, there is a saying “a broken clock is right twice a day”. If you are investing for your retirement, you will probably only experience two or three market cycles. If you were not well prepared in the previous financial crisis, you need to get ready for the next one.

That is why I developed GMC investment framework to help my clients manage their investment portfolios towards and through their retirement years. If you are interested in finding out more about my services, submit your request below for a non-obligatory investment discovery meeting.

About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • Quite a number of people & financial bloggers reached FI when they continued to buy big in 2008 & 2009. Especially if they maintained their high paying jobs & moved their high savings rate into bombed-out markets.

    It’s those who bought big in 2006 & 2007 and then couldn’t hold through the subsequent few years of recovery that lost.

    PS: my entire portfolio had declined by 40% in Mar 2009 & not only was I unemployed but I was also living off dividends from the portfolio. Pretty stressful especially in Oct 2008.

    • Hi, Sinkie

      Thank you for sharing.

      Yes, the investment cannot be isolated from your other financial commitments and resources. And your earning ability an important factor for financial freedom.

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