The warning “capital is at risk” is everywhere when investing, and if you’ve experienced a stock market drop, then you’ll know ‘why’ this is with complete clarity.
Seeing the value of your investments fall can be uncomfortable, and even downright scary at times. After all, you’re investing to make money, not lose it, right? Yet unfortunately, investment journeys are never a straight line of growth – and, for many people, this risk stops them from investing at all.
But if you’re reading this coming out the other side of a market drop, then congratulations, you did it! You stood firm with nerves of steel and held your investment plan through the dip. So, what happens next?
What is a stock market crash?
It may seem like we’re going back to basics, but to know what’s next, you need to know what you’ve been through in the first place.
Although terms like ‘crash’, ‘correction’, and ‘bear market’ are sometimes used interchangeably, they’re not the same thing. And that’s important because how markets react changes for each:
- Correction – this is a drop of 10% or more. This could affect individual asset types or entire financial markets and could happen over the course of a number of days, weeks, or months.
- Bear market – these tend to last longer, drop further, and have a wider impact than a correction by declining 20% or more over a space of two months or more.
- Crash – the biggest of them all, dropping more than 20% - often over a very short space of time. These typically result from unexpected circumstances, like a bubble burst or a global pandemic.
Each of these could happen separately, or one could lead to another. For example, the difference between a correction and a bear market is severity and time. So, if a correction causes the whole market to decline past 20% for two months or more, then it might become a bear market.
And now you know how to identify what you’ve been through, next it’s a good idea to know what caused it. So, let’s move onto the next point...
What caused the stock market drop?
There are thousands of potential reasons why a stock market might crash and knowing what caused it to dip can help you understand more about the type of investments that are impacted. This is important because each type of investment can be affected differently, which is why diversifying your portfolio could be good practice as an investor.
Let’s take the 2020 coronavirus pandemic, for example. The lockdowns we experienced around the world were directly responsible for the crash where we saw tech stocks perform well, but the hospitality industry take a hit. The reason for this was simple - people couldn’t go out and take part in many leisure activities, but the demand for products like new computers, phones, and software skyrocketed while we were all stuck at home.
Not every drop is going to be the same, but understanding why it’s happening could help to give you an insight into how your investments might perform over time.
What to do after a stock market dip?
If you think that you’re approaching (or have reached) the bottom of the drop, there’s a few ways you could take advantage of it, including the only benefit of a market crash – lower share prices!
However, not all investments here will be ‘bargains’ so it’s important to do your research before you buy.
One thing to consider, regardless of whether you’re still in a dip or not, is Pound Cost Averaging. This just means buying small amounts of investments often – like you would do by setting a direct debit up for your Investment ISA with Wealthify. This could help you take advantage of lower prices during market drops, which could help to smooth out any bumps in performance.
And if you started to get really worried during the drop, then you might want to reassess your investment risk level and make sure that it’s still right for you. While more risk could mean greater profits, it’s a two-way street, which may mean greater losses too –so you need to be comfortable with your decision.
Market drops can be a difficult time for investors if your investment plan isn’t diversified. And that doesn't just mean investing in different companies, but also different industries, regions around the world, and types of investments - like government or corporate bonds, property, and even commodities such as precious metals.
So, why do this? Well, having different types of investments in your portfolio could help to balance out your performance over time. For example, in 2020, if you were invested in tech as well as hospitality, then the overperformance of the technology sector may have helped to ease the decline experienced by businesses in the hospitality sector.
Will the price of my investments go back up?
While we’d love to say yes there’s a huge number of factors that can impact this. The two most significant things are what you’re invested in, and how long you’re planning to invest for.
However, did you know that if you were invested in the MSCI World Index (which tracks 23 developed markets) for any 15-year period since 1984, then you’d have had a 100% chance of making a gain?1
Generally, investing works best when done for the long-term. So, the more time you leave your money invested for, the more time you’ll have for your investments to potentially recover from any market dips you’ll face along the way – meaning you could be more likely to make a return.
If you have a diversified investment plan, it could help you to recover even faster – with those industries that are doing well balancing the performance of ones that are struggling. But, of course, this all depends on what caused the drop in the first place!
Are you ready for the next one?
Unfortunately, market drops aren’t all that uncommon. Corrections can happen at any point, but statistically, they happen once every 19 months. That’s based on the S&P 500 (which tracks 500 large companies listed on the stock exchange in the United States), looking back to the year 1928!1
However, it’s important to note that 19 months is an average, not a date. Timing the market isn’t just difficult, it’s almost impossible to do.
What’s not impossible to do, however, is preparing yourself the next time the market drops. As you’ve already been through it once (or maybe even a few times due to the various factors that have impacted the markets this year), you’ll now have a better understanding of what to expect if you face another dip. So, you could make some changes to your investments to help yourself feel even more comfortable and confident in your long-term performance in the event it does happen again.
At Wealthify, our team of investment experts are constantly monitoring the market, making strategic decisions, and carefully analysing performance to help you get the most from your investments. You can choose a level of risk for your Plan that best works for you, and even opt for Ethical Investments if that tickles your fancy.
Plus, it’s easy to monitor your performance 24/7 through our app or online dashboard – giving you a clear view of your investments without needing you to do anything too complicated or time consuming.
- Data from Bloomberg
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not offer advice. If you’re not sure whether investing is right for you, then please speak to a financial adviser.