What I Learned from My First Market Crash

When I first started learning about the basics of investing, there were a few key points I couldn’t escape from. Have a diversified portfolio. Don’t put in any money that you’ll need within the next five years. Keep investing regular sums over a long horizon and compound interest will do the work for you. Above all: time in the market, not timing the market.

I’m far from an expert in the finer details of investing, but one of my main takeaways was that I didn’t actually need to be. As long as I chose a safe, diversified fund and didn’t do anything crazy, stock market expertise was far from essential. So, I put my faith into the Vanguard LifeStrategy funds and set up my direct debit. Easy.

I couldn’t help but wonder how people were messing up this investing business so badly. Professionals and DIY day traders aside, why would anyone sell their shares at a low when the clear consensus is that they shouldn’t? Maybe there were some people who needed the money due to unfortunate circumstances, but other than that, I couldn’t understand it.

Experiencing my first financial crash as an adult and investor has been a wake-up call that we can react in unexpected ways when uncertain.

When the markets first started falling

I opened my first investing account in December 2019. I’d held off for a while to do more research — and because every man and his dog was predicting an upcoming recession.

Eventually, I bit the bullet. Partly because I knew I shouldn’t try to time the market, partly because I was impatient.

So, I started investing with the expectation that the value of my shares would fall at some point, perhaps sooner rather than later. I kept most of my money in savings — that didn’t count as timing the market, right?

In March, I first saw the value of my investments falling. And it didn’t feel too bad. Sure, it sickened me that the money I’d invested was already worth less than it had been a few months ago. And I couldn’t help but think I should have waited longer. 

But there was also a feeling that this was normal. Theory in action.

Besides, I felt slightly smug that I’d put off investing the bulk of my wealth.

I knew I wouldn’t be able to predict the lowest point, so I calmly invested a small chunk of my savings every time there was a dip. I felt like I’d got this; I was prepared. Perhaps my overconfidence should have been the first warning sign.

Then the market fell more

But the drops just kept on getting bigger. A 10% drop wasn’t nice to see, but 20% was difficult to comprehend — before then, my investments had only moved by a few percentage points. Eventually, the drop reached 30%. 

Even though I was continually buying more at the lowest points, I just kept losing money.

At first, it didn’t deter me. The pandemic was a temporary phenomenon and the markets would recover, right? No need to panic. It was time to “be greedy when others are fearful” — I figured out how big an emergency fund I’d need and decided to invest everything else.

But then I started talking about my plans with other people. I thought my emergency fund was conservative, but my mother looked at me like I was crazy for not wanting to keep all my savings as savings. Everyone thought it was “risky” to invest in the stock market right now.

Somewhere along the line, a seed of doubt was planted in my mind. 

What if this time was different? This was something new — a global pandemic. What if thousands of major companies went bust and the stock market got obliterated? What if all my savings lost all their value? Wouldn’t it be better just to cash out now, and maybe buy an ax or something?

Ideas that had baffled me a few months again were entering my mind — suddenly, I could emphasize with the panic sellers. What was going on?

Navigating the panic

Luckily, common sense prevailed — more or less. After breaking down the situation, I realized that if the stock market really did get obliterated, it would be the end to the world as we know it. A descent into complete anarchy where money wouldn’t be particularly helpful.

Or, things would recover and get back to normal. 

There was more to lose than there was to gain by doing anything drastic. I continued to invest small sums, and I certainly didn’t make any sudden sales, but I slowed down the pace and opted for a larger emergency fund.

Everything that had seemed so obvious a few weeks ago was suddenly cast into doubt. I was losing my nerve.

Then, suddenly, the market started to recover. It seemed so random — the world had shut down, after all — so I waited for my investments to drop again. At the time of writing, they still haven’t.

My little game was over. And it was a relief.

The power of hindsight

Because of the investments I made when the market crashed, my overall portfolio is now up 5% — even though the fund I’m invested in has dropped by 10% since February. It’s easy to look back and think the outcome was always obvious, that I should have invested even more to take advantage of the obvious gains.

But it wasn’t obvious at the time.

When the market was at its lowest point, I had no idea it was the low. I thought it would dip even further, or at least stay down for a while. I don’t think many people expected such a quick recovery.

I can now see that the basic investing theory I’d learned proved to be correct. I was fearful when others were greedy and greedy when others were fearful — and it paid off. But I wouldn’t do it again.

I’m not as rational as I thought

The primary lesson I’m taking from this isn’t that I should have had more faith in the market’s recovery. It’s that I can’t trust myself to react logically under extreme uncertainty.

Despite half-expecting the crash and mentally planning what I would do beforehand, I still wasn’t able to keep a clear head. It could have been much worse if I hadn’t expected it 

In the future, I’ll be sticking to my monthly contribution plan and trying to avoid managing my investments during times of extreme uncertainty. I’d advise you to do the same.