Stock market crash 2020: What should investors do now?

Stock market prices, which have risen steadily since the financial crisis of 2009, apart from a few interruptions, and once again reached all-time highs in February 2020, have slumped by 20 to 40 percent within a few weeks – depending on the index.

Younger investors in particular therefore lack the relevant experience. They are now being put to the test with the 2020 stock market crash. Despite all the adversities and uncertainties that the coronavirus crisis has brought us and will continue to bring us, it is important to keep a cool head and defy the prevailing panic on the stock market.

In this article, we want to show you specific ways of coping with this turbulent time without stress and, yes, benefiting from it!

2020 will undoubtedly be a year steeped in history. A year that began full of confidence and optimism. This mood manifested itself on the stock market at least. Whether MSCI World, SMI or S&P 500, they all reached all-time highs in February (see Figures 1, 3 and 4).

A few weeks later, the world looks completely different. The previously unknown coronavirus SARS-CoV-2 mutated into a pandemic at lightning speed. It now threatens to paralyze the whole world. The damage caused is already immense (as of April 3, 2020): 53,000 people have died and over a million have tested positive for the virus. There is no end in sight. On the contrary: the numbers are rising exponentially.

“large parts of humanity are in crisis mode”

Almost every country in the world has been affected. Many countries have declared a state of emergency, closed their borders, closed places of assembly – especially schools – and imposed curfews. Our working life in Switzerland is characterized by working from home or – for particularly exposed occupational groups such as hairdressers, employees in the fitness industry, hospitality and education – by officially imposed work bans. Anyone who also has children of school age currently has to prove themselves in the discipline of “homeschooling”.

In short: large parts of humanity are in crisis mode and a full-blown global recession is imminent. And that brings us to the real issue, namely the financial situation for us investors.

And suddenly the stock market crash of 2020 is here

But before we go into our preferred strategy, let’s first take a look at some charts of well-known indices to get you in the mood. The highs and lows entered and dated in the following charts refer to a period of 52 weeks with a cut-off date of April 3, 2020.

Pandemic drags everything down and the stock market crash of 2020 takes its course

It is noticeable that the share charts selected above have been moving quite synchronously, i.e. almost vertically downwards, since the start of the crash. Incidentally, the price slump has also affected other asset classes such as real estate and precious metals. In addition, oil prices plummeted, triggered by the failure of negotiations between Russia and Saudi Arabia to limit oil production.

“a total loss can be ruled out with broad market indices”

But now back to the charts above. We can draw the following conclusions:

1. When there is panic on the markets, even broad market indices such as the MSCI World with over 1,600 companies from 23 countries react very volatile . In extreme situations, they can lose a third of their value within a few trading days.
2. In a bear market, the downward movement is much faster than prices rise in a bull market. For example, the MSCI Emerging Market is currently (3.4.2020), i.e. taking into account the most recent upward movement, 16.4% lower than five years ago (see Figure 2). The MSCI World and SMI are more or less at 5-year levels (see Figures 1 and 3). Only the S&P 500, which is limited to US companies, is still significantly higher at 19.6% (see Figure 4).
3. Even if the price losses are severe, a total loss can be ruled out for broad market indices. The situation is different for investments in individual stocks. As a result of the stock market crash in 2020, there will be countless company bankruptcies. The most recent example: the already ailing restaurant chain Vapiano. But even supposedly solid companies have suffered extreme collapses in some cases. Below are some examples with the percentage change between the highs and lows of the last 52 weeks as at April 3, 2020:

• TUI AG (-81% / Tourism)
• Boing Co. (-78% / Aviation)
• Thyssenkrupp AG (-71% / steel processing)
• Royal Dutch Shell Plc (-65% / Crude oil)
• Credit Suisse AG (-54% / Finance)

Acting wisely as an investor now

In the stock market crash of 2020, your hard-earned share capital melts like ice cream in the spring sun. Even brief phases of recovery are no consolation. What should you do? “Buy when there’s blood in the streets” or “don’t fall for the falling knife”? If you ask ten “financial experts”, you will get ten different answers.

Our tip is very simple: follow your strategy consistently! After all, strategies are by definition geared towards the long term and don’t just apply during periods of good weather. However, if you have come to the realization that your current strategy is no good in such turbulent phases, now is the right time to redefine it.

Our strategy as a long-term “buy-and-hold” investor with investments in predominantly passive, globally diversified equity ETFs is based on a predefined asset allocation (see our article Asset allocation: the nuts and bolts of your investment). The core of this asset allocation is a percentage split of the assets into a low-risk and a high-risk portion. This division is based on our individual risk profile, i.e. investment horizon, risk appetite and risk capacity. The 2020 stock market crash won’t change that!

Buy, buy, buy

And yes, it is therefore crystal clear what we are currently doing: Buying, buying, buying. If we did not carry out this rebalancing (see our article Rebalancing your assets), the result would be an imbalance between the low-risk and risky assets. In other words, our cash reserves would be proportionately too large.

An example to illustrate this: True to your 50/50 strategy, you have invested half of your assets of CHF 100,000 in your bank account and half in global equity ETFs. The crash has now reduced your assets to 85,000 francs. Your asset allocation now looks like this: CHF 50,000 cash (59%) and CHF 35,000 equity ETFs (41%). With an investment of CHF 7,500 in equity ETFs, you achieve a 50/50 ratio again according to your strategy.

This rebalancing results in a return-enhancing side effect: you buy at relatively low prices and thus reduce the average cost price of your investments. Remember: an ETF on the MSCI World Index lost a third of its value within a few weeks. Some would call an iPhone with such a generous discount a bargain. And they’d be brave enough to grab it.

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Learning from the past

Another important point: our considerations are of course based on a fundamental confidence. We assume that the economy will recover. Just like after the oil crisis in the 1970s, the dot-com bubble (2000) or the financial crisis (2008): Share prices always plummeted vehemently, as if the end of the world was imminent. But as we know in retrospect, share prices recovered quickly and reached all-time high after all-time high. Until the next stock market crash, which nobody could predict.

If you would like to find out more about the “stock market crash 2020” and the corresponding options for action, we recommend the interview with Gerd Kommer, an author we hold in high regard, which Thomas Kehl from Finanzfluss recently conducted with him.

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Disclaimer

Disclaimer: Investing involves risks. You must decide for yourself whether or not you want to take these risks.

Errors excepted: We have written this article to the best of our knowledge and belief. Our aim is to provide you as a private investor with the most objective and meaningful financial information possible. However, should we have made any errors, forgotten important aspects and/or no longer have up-to-date information, we would be grateful if you could let us know.