About 10 years ago, a market downturn caused by subprime mortgage crisis in the United States resulted in a global financial crisis (a.k.a GFC). There is a theory that economic works in a cycle, so statically we are due for another market downturn soon. If you haven’t started your investment yet, now may be the best time for you to start now. Yes, you hear me right, start right before the market downturn … just like an idiot.
Jim – Hypothetical Scenario
Jim is a typical Kiwis. He purchased a house at 35 with a 30 years mortgage. Although he is not frugal, he lives within his mean. He’ve got KiwiSaver that he doesn’t pay much attention to and he put all his disposable income on his mortgage. He managed to pay off his mortgage in 18 years, so he moves onto the next logical thing – save and invest for retirement. At age 53 and without a mortgage payment, Jim put all his disposable income into investment. At that time, the market just came out of recession and his investment portfolio (including shares and a rental property on a mortgage) jump to 350k in 7 years. Jim is well on track to have a comfortable retirement in a couple years.
At his 60 years old, a financial crisis hit.
Jim lost his job and struggle to find a job with similar pay. His portfolio drops to 200K in 8 months and he still paying the mortgage on his rental property. His emergency fund is drying up as well due to the mortgage pressure. Every day he saw his portfolio went down a little, his heart sank a little. He can’t stand to watch his portfolio stinking every day, so he decided to cash out. The market down for 3 more months then slowly recover, but Jim didn’t get back into the market.
Jim did the logical thing, focus on paying off his debt then invest for retirement. However, Jim never experiences a financial crisis first-handed. He made the mistake of getting out of the market at a wrong time. If he can get his head down and stay in the market, he should ride out of the downturn and come out on top.
Learn by Failing
Anytime is a good time to start your investment as long as you are free of consumer, debt, joined KiwiSaver and have an emergency fund in place. The reason I think you should start your investment before the market downturn on the horizon is that you needed the experience early on. You need to understand and experience the market will go up, and it will go down. You can read blog and books about what happened in the last downturn, but you don’t know what it’s going to do you mentally unless you have a stake in the game.
By starting your investment before a market downturn, you will have the first-hand experience on what happened during a crisis. You will know what it will do to you when you saw your portfolio is down 50%. Imagine every month you put $500 into an investment, but the value still doing down. You may feel you just dumping cash into a trash can. Should you stop or keep putting money in? You may think you can be logical in this situation, but you will never know what the pressure will do to you.
The other reason to start before a downturn is you want to fail small. Since you are just started, your portfolio should be relatively small. If you did something unwise, it would only hurt you a little. You will learn a lot more from it and try not to reply that in the next downturn
You want to make a mistake and fail when you are young and have $20,000 on the market. So when you are in your 50s, having $300K in the market, you can make a logical decision like an experienced investor.
My Own Fear
I only started investing after the last GFC, so I never experience a market downturn. For the past couple years the market has been up a lot and I were happy to add more money to my portfolio. If a financial crisis hit, I know I need to sit tight and ride out of the recession. However, I can’t be sure if I can stick to my plan.
I read on a forum that a US couple retired with a $4mil portfolio, when the GFC hit, their portfolio dive to $2.2mil. Despite people on the forum telling them they can sit out of this recession comfortably, they decided to take the $1.8mil lost and cash out their investment. I remember the couple said, “I can’t take the stress anymore. I have to get out.” Given people on that forum usually are experienced investors, I am surprised a market downturn can make an investor take a $1.8mil hit. I just don’t know how I will react.
I guess I will have to wait and see.
- No doubt there will be another market downturn coming
- You should start your small investment now and experience the downturn
- Despite you know what to do during a market downturn, you may react differently
- Experience a downturn in your early stage, you will gain a lot of knowledge and make you a better investor.
- Also, having a small portfolio will limit your losses.
- You will be well prepared for the next recession when you have a much bigger portfolio.
- You don’t want to be head into the market downturn with lots of money and no experience.