Episode 11

Financial crash proof your share investments

Welcome to Finance and Fury!

  1. Financial Crash proof your Share investments
  2. There is no way to control the rise and fall of investments but focusing on what you can control makes all the difference!
    • Behaviours lead to under performing, or outperforming, the ‘market’
  3. Firstly – What you buy and when
  4. Secondly – What you actually do when a “crash” occurs

What is a correction or crash?

  1. Drop on prices – followed by mass hysteria – panic selling – further declines in investment values
  2. Shares can drop quickly – They are liquid
    • Liquidity = How easy is it to sell shares and get your cash back
  3. The share market is a measure of crowd behaviour
    • Positive feedback loops

What triggers a crash?

  1. Prolonged periods of rising markets, excessive in the long term
    • P/E far exceed long term averages
    • Higher buying volumes
    • Year on year large gains
  2. Then something spooks investors to think the good times are over
    • If the markets think good times are done with, they will be
    • Self-fulfilling prophecy – positive feedback loops

What makes people sell shares at a loss?

  1. Myopic Loss Aversion – Fear of further losses – Losses (even on paper) are hard to bear, so people crystallise losses to avoid feeling further potential paper losses
    • Shares are some of the most feared investments out there
      • People feel like they can’t see or touch them, but if you buy some Woolworths – just remember half of you probably visit a store once a week.
      • They are hard to understand – Fear from the unknown
  2. History of share crashes and the drops – 1987, 2008 (worse than US)
    • What happened before this? Markets rose – 2002 to 2007 = 226% rise

What can you do? 

On the buy

  1. Diversification – Have one egg, it breaks, you have no eggs. If you have 1,000 eggs and one breaks, you’re ok!
    • Different segments – Not all banks, but across large, mid, and small cap, as well as different types of companies
    • Different countries/economies – we make up 2% of share market – 98% of companies are off shore
  2. Don’t overpay for investments
    • FOMO – Bubbles in shares are pretty clear
    • Market PE – Shares are valued mostly on expected future earnings (inherent values).
    • Where are we at now?
      1. Gains – 194% cumulative rise in the market since 2012 – but still not above 6,700 in 2007 pre GFC
      2. PE – In line with long term average

  1. Don’t buy rubbish – never invest out of hope into shares that might not be around tomorrow
    • Shares are ownership in a company – Is it a good company? Will it be around in 10 years?
    • Is it a fad, and not earning? They don’t survive crashes as well – avoid speculative shares

When the crash happens

  1. Don’t panic sell!
    • What happened the next year? After a crash there is rebound
      • Why? Demand picks up the following year
    • Buy more! If you are game!
      • Why would you buy something going down? Why is it going down?
      • You can buy investments on special – 2 for 1!

Let me get the crystal ball out…

  1. The next crash – Will come in form of borrowings within debt instruments / levels of government debt especially in the US. The market freaks out because they think the government can’t service their debts and default on their debts.
    • Sad truth – free market gets blamed for government interference
  2. Nobody knows what will happen.
    • Hold for long term

In summary

  1. Markets work in cycles – they go up, they go down
  2. The long game – hold and buy – Next Sunday we talk about FEAR and avoiding emotions

Thanks for listening – we need YOUR feedback! Leave a review, or ask your finance question at financeandfury.com.au/contact

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