A road trip to financial freedom

Covid-19: This is what a crash feels like

By Lizelle Steyn

19 March 2020

When I was in my twenties, I was in a car crash. Fortunately I wasn't driving, but sitting in the back, obediently wearing my safety belt (about a month or two after the new legislation requiring belts at the back came in). Even though we were moving at less than 60km/h when hitting a stationary car, the impact was absolutely shocking. I remember everybody's glasses were flung off their faces and onto the dashboard. It's something I never want to experience again.

Long-term investors don't have the luxury of a bubble-wrapped journey right up to the final destination, though. If you want to beat inflation and grow your wealth, some exposure to volatile markets is necessary. And with that comes The Crash. Exactly like the one we're in right now.

What happened?

There have been talks about a global recession for a while now. Part of it is just the natural business cycle. Part of it is countries acting more and more in self-interest, of which the trade war between the US and China is an example. Brexit is another. International trade agreements that have been in place for years have started falling apart. Then a highly infectious disease called Covid-19 or coronavirus broke out and was soon classified a pandemic by the WHO. Add to that an oil price war between Saudi and Russia, and the pressure became to much. Financial markets cracked.

How bad is it?

Pretty bad. By Monday, 16 March, we experienced the second Black Monday in a row. And then markets continued to fall. Stock markets last fell this deeply in 1987. It's definitely the worst I've seen in my 26-year career in financial services. The JSE has lost about a third of its value since the start of this crisis.

How long will it take to recover?

I don't know. Nobody knows. And don't believe anybody who claims they do. But we do have data on how long the stock market took to return to pre-crash levels for other crises. Let's look at the Dow Jones, the 30 company leaders in their respective industies, for example (source: Forbes and Bloomberg).

Pre-Crisis Peak to bottom Size of the fall Recovery time
Great Depression. Aug 1929 - Jun 1932 -89% +/- 25 years
Black Monday. Aug 1987 - Nov 1987 -31% +/- 2 years
2000s Recession. Dec 1999 - Sept 2002 -34% +/- 4 years
Global Financial Crisis. Oct 2007 - Feb 2009 -49% +/- 4 years

If one looks at what the S&P 500 (500 largest stocks in the US) did in the past, the figures look significantly worse. The S&P 500 took eight years to recover from the 2000s Recession and six years for the Great Recession, also known as the Global Financial Crisis (source: Forbes).

What should you do?

The most difficult thing for most people: do nothing (initially). Let your debit orders into your investment account continue as normal. But wait a bit for lump sum investments. I made the mistake of buying more of the equity market, thinking it was offering good value after its initial fall, on the first of the 2020 Black Mondays. The market has fallen nearly another 20% since then. I should know better, really. Rather wait until the price fluctuations calm down a bit and then only buy what you normally buy for your long-term investment plan, just at cheaper prices than before.

"The stock market is a device for transferring money from the impatient to the patient." - Warren Buffett.

What's the worst thing you can do?

Sell out of your investments or switch to a money market fund. If you do this, you lock in all these losses and have no chance of taking part in the upswing when it comes - and it will (eventually).

Is there a silver lining?

I believe so. This crisis seems to be good for the planet - less travelling, less production, and therefore less pollution and exploitation of natural resources. The drop in business demand for electricity might even mean less loadshedding for the rest of 2020.

For those who've been dreaming of working from home or remotely, now's your chance. Most big business are rapidly putting remote working infrastructure in place.

We're ALL poorer now and may stay this way for many, many years. (Unless you had no investments or kept all your money in cash.) So far, R4 trillion has been wiped off the Johannesburg Stock Exchange. That's for a large part ordinary people's money - pensioners, people building their pension funds. Ordinary people investing their windfalls. Maybe, as a collective, we'll become less materialistic and wasteful in coming years. Maybe we'll appreciate and be content with the things that don't cost money. Maybe it's time to explore and savour our own country more.

And for those on the financial freedom (or FIRE) journey, a few more years have just been added to our FIRE journey. Maybe now we'll really be nudged to shape and create that job we love, because we've just been swallowed by a very big snake in the snakes and ladders game of investing.