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share market crashes

I posted this article on the site a year ago. Thought I would repost it.

INTRODUCTION

It is not a secret that the stock market can be volatile; history has shown us this. There are many factors which are the cause of a falling market; they could be a change of President in the US, correction in the market, or nervousness by investors resulting in them selling off their stocks. Whether a 1929 or 87 style crash occurs this decade or not, one thing is clear; it is still important to save and invest for the future because one thing is certain; you will cease working one day and need something to fall back on.

History of share market crashes

When one thinks of share market crashes two years spring to mind, 1929 and 1987, hopefully, such crashes on the scale which wiped out life savings are not going to occur in the foreseeable future. It is not guaranteed that it will not happen, but then nothing in this world is guaranteed apart from death and taxes.

There have been other financial meltdowns outside of the two main ones. Asian Financial Crisis of the 90s and the GFC of 2008 wiped billions of dollars off share values. 

The next major financial meltdown in the markets could be caused by the very people who will be most affected by it, Baby Boomers.

Why?

Because as more and more of them retire, they will withdraw their savings out of the stock market causing a major selloff.

This has been predicted in the past but there has not yet been any sign of this happening with the markets at record levels, however, who is bold enough to predict which direction the stock exchange will head in the future?

One thing you can guarantee is that there will be another market crash in the future; investors just need to be prepared for it.

Here are the most notable share market crashes within the last 100 years.

1929-The Wall Street Crash

The Wall Street crash lasted for over four years. Investors borrowed money to buy shares and when shares were sold off to repay the money to their creditors investors were left out of pocket. The 1929 crash led to the 1930s Great depression.

1962-The Kennedy Slide

The stock market had enjoyed a steady rise since the 1929 crash with the ten years prior to 1962 being good ones for the stock exchange. This all changed in January when share prices plummeted. President Kennedy attributed the decline as a correction for the rises of the past ten years.

1973-74-Stock market crash

The Dow Jones fell by 45% during the stock market crash which lasted two years between January 1973 and December 1974. The UK markets feared even worse losing 73% of it’s value during this time. The collapse of the Bretton Woods System was to blame. This is a system devised many decades earlier on an agreed fixed currency rate. 44 countries met in Bretton Wood to discuss the currency issue in 1944 hence the name Bretton Woods System.

1987-Black Monday

19th October 1987 will always be known as “Black Monday,” after the biggest one day fall in the stock market in history took place. Leading up to the crash many traders borrowed money to purchase shares and as share prices rose they borrowed more money using the value of their shares as security, however, when the stock market dropped by 20% in one day many investors owed more money than the value of their shares and found themselves in financial turmoil.

1997-Asian Financial Crisis

Many stock markets in Asia fell dramatically between July and October due to an overheated market. Many who bought shares on credit or with borrowed money were hit hard by the crash.

2007-2008-Global Financial Crisis

The failure of several financial institutions in the United States.

2020-The Covid Market Crash

Stock markets dropped 34% in one day on March 23 2020 as Covid-19 was starting to take hold. This started a worldwide recession caused by the Covid-19 pandemic.

Who knows when the next share market crash will occur; one thing is for certain, it will be out of the control of investors. It is up to each of us to plan our finances in such a way as to minimise the effect of a financial meltdown in the markets. This can be done by diversification; that is by having your money invested in a range of industries. This way you are not placing too many eggs in the one basket.

ABOUT THIS ARTICLE

This article does not represent financial advice, but rather is the opinion of the writer. It is strongly advised that you seek independent advice from a qualified person. Feel free to share this article. You may use this article as content for your ebook or website. Visit my site www.robertastewart.com for other articles.

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LEARNING FROM PAST FINANCIAL MISTAKES

This article is of the writer’s experience and opinion. If you require financial advice then see your bank manager or financial advisor.

Learning from past investing mistakes

By Robert A. Stewart

“He who never made a mistake never made anything,” but there is no need to make a mistake if you can help it. How? By learning from other people’s mistakes.

The most tragic thing of all is to not learn from your own mistakes; here are some tragic examples which have left people with badly burned fingers.

In October 1987 the sharemarket crashed bigtime; there were horrific stories of mum and dad investors losing fortunes. Leading up to the crash investors would borrow money to purchase shares by using the value of their shares as collateral. As the share values increased, they were able to borrow more and more money. One story I was told was of a man who borrowed money using the value of his home as collateral. 

Many companies were basically called paper shufflers; in order words they were not producing anything tangible but trading in shares.

It took several years before the market recovered.

One should never borrow money to purchase shares which is the first basic lesson of investing.

During the Global Financial Crisis several finance companies went belly up in NZ; these included Provincial Finance, Hanover Finance, Dominion Finance, Lombard Finance, and South Canterbury Finance. There were sad stories with one common one being of investors who had their whole life savings invested in the company. The media’s spin on this is to tell the viewer about the investors who lost everything they invested but that is not the case. The truth is investors were drip-fed money from what the receiver’s could recover.

The investors concerned had a lot to say about all of this but one thing was never mentioned was the fact that they placed all of their financial eggs in one basket. This is a fundamental mistake. In one case, an investor had NZ$400,000 invested in Hanover Finance. One would have thought an investor with commonsense would have spread their money around. 

It does make one wonder whether someone provided this investor with misleading advice. 

The second basic lesson is to not place all of your financial eggs in the one basket.

Crypto currency such as Bitcoin and the like have been very popular during the last ten years. Stories of great wealth have been floating around from time to time of investors who have invested x number of $ and turned it into a fortune worth x. My view of Crypto Currency is that it should be treated as a bit of a gamble where you only invest discretionary income in. Only money you can afford to lose should be invested in crypto currency.

A company called “Cryptopia” which was basically a blockchain which held funds invested in Bitcoin was hacked into and all those with bitcoin invested with cryptopia lost their money. There were some sad stories of an x amount of $ lost.

The third lesson here is to NEVER invest money in cryptocurrency which you can not afford to lose. In other words only use your discretionary money for Bitcoin.

It is certainly well worth remembering that if there is a chance of capital gain then there is also a chance of capital loss. That is the nature of investing.

The bottom line is this; “It is up to YOU, the investor to take responsibility for your mistakes.

www.robertastewart.com

Investing in Gold is worth looking at but like other investments an investor needs to do their research, check out the following;

https://affiliates.goldco.com/l/1VRW1MU2Q/

Sign up for future email updates  and receive the free ebook, “Financial Steps,” here; https://forms.aweber.com/form/72/892285272.htm

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WEALTH CREATION DOES NOT JUST HAPPEN

Wealth creation does not just happen….

It is the result of living within your means, saving, and then investing.

Simple isn’t it?

So why are so many people have so little to show for their years of working?

There is no one answer to this question, but…

whatever the reason for their lack of financial success can be summed up in just two words;

Financial illiteracy

People are not broke without a reason and neither are they prosperous without a reason.

If you divided the world’s wealth equally between its citizens, it will not be too long before everyone will return to the same financial position as they were previously because everyone has developed habits of using their money which will either build their wealth or keep them poor.

There is no secret to the financial success of those who build their wealth, and it can be summed up in two words;

Financial literacy

No one is born with financial literacy, just like education of every other kind, it is learned. 

So where do you learn about financial matters?

Start with your local library, there are plenty of books you are able to borrow on financial matters. Your local bookstore, ebay, or Amazon all have books on finance while you may pick up the odd book on the subject from a charity shop.

One good book to keep an eye out for is “Rich Dad Poor Dad,” there are a lot of other books from the same author. 

The author of Rich Dad Poor Dad stresses the importance of developing income producing assets and reducing those or at least eliminating liabilities which cost you money.

I have a free ebook to give away, it is called “Financial Steps.”

All you need to do is join my mailing list on the following link;

https://forms.aweber.com/form/72/892285272.htm

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TURN DEAD MONEY INTO SEED MONEY

Turn dead money into seed money

Financial success is much easier than you think and is often just a matter of prioritizing your spending. The first thing to do is to find out where your money is going and where is disappears into the sunset never to be seen again. Much of this type of spending is dead money because you have nothing to show for it. You need to convince it to stay at home and work for you rather than fill someone Else’s pockets.

There are a number of money leaks which drain your finances so lets take a took at some of the main culprits.

INTEREST

If you have hire purchase loans, credit card loans, or bank or finance company loans then a good deal of your money is being spent servicing the loan. There is a cost to using other people’s money to buy stuff and that is called interest. In order to become debt free and save money, you need to decide on what youer priorities are and MAKE SACRIFICES. As painful as it may sound, you must do an audit in order to work out how much of your money in going in interest payments per annum.

If you are seriously in debt then talking to a budget advisor make sense.

STUFF YOU NO LONGER NEED

Everyone has stuff they no longer need just lying about around the house. This can all be considered “dead money”. Your stuff can be converted into cash and turned into seed money for your future wealth. Selling the stuff on ebay will give you some extra money to invest. You can then put this money to work for you.

HOBBIES AND SPORT

People will spend a fortune on their hobbies and the question of whether the amount you are spending on yours is going to affect your financial plans in the future. We hear of people who spend absurd amounts of money on whatever they are collecting yet when it comes to retirements savings bury their head in the sand. The money spent on this stuff is really dead money because it is not producing any wealth.

Sport is in a separate category altogether because being a participate in sporting activities promotes health and well being but you are able to minimize the amount spent so that what it is costing you does not get out of hand.

MONEY LYING IDLE

Money just lying in a low interest account earning just 2% interest is losing its value because when inflation and tax are both considered, it has lost its value and is worth less than 12 months ago. It all depends on what the purpose of that money is. If it is rainy day money then you may be better off investing it in Bonus Bonds where instead of being paid interest, you go into a draw to win prizes including a million dollar prize. It may be a long shot but at least you have a chance.

It all adds up during the course of a year. $4 or so for one cup of coffee per day does not sound much but if you buy say three cups of coffees per day that is $12 per day you are spending on coffee. That is $60 per week (5 days per week) and during the course of a year, that is $3,000 worth of coffee you are drinking. That could be your retirement savings or an overseas trip, or whatever you may prefer to spend your money on which you can see with your own eyes what your labours have paid for.

Learn to look at your spending on an annual basis because it does not sound like money money when you are paying for something in small amounts but like a dripping tap, leaks like this can add up to a lake. These little money leaks can then be used as your seed money to build your future wealth.

Special Note

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www.robertastewart.com

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CAPITAL GAINS TAX

Capital Gains tax and kiwisaver

The talk in New Zealand these past two or three weeks has been the possibility of the introduction of the Capital Gains tax. This is likely to be at 33%. irrespective of which tax rate you are on. So if for example you are on the lower income bracket paying tax of 17.5% then your kiwisaver provider would still pay 33% tax on any capital gains on your kiwisaver. The capital gains tax could be mitigated by new incentives by those in the scheme or at least encourage those who have not joined to do so. All will be revealed in May’s budget but it is likely that the $1000 kickstart will be reinstated and that the annual tax credit will be increased. It was the last National government who scrapped the kickstart in order to balance the books. They also reduced the tax credit from $1040 to $520. Prior to the reduction, you had to deposit at least $1040 to get the full government tax credit so that was in effect the same as making 100% on your investment, tax free. Then National reduced the tax credit to $520 but you still had to deposit $1040 to get this which is like earning 50% on your investment.

As for the $1000 kickstart. If you are a school leaver or have not got around to joining kiwisaver then it may be a good idea to wait until after the budget to see what unfolds. It really depends on timing because Grant Robertson (The finance minister) may decide that they changes will take effect on July 1st which is the start of the kiwisaver year but if the changes take effect immediately after budget night then it would be good sense to join kiwisaver in order to collect the 1k kickstart and deposit at least $1040 into your kiwisaver account by 30th June in order to collect July’s tax credit.

Another change which has been talked about is the scrapping of the tax on employer contributions for those earning less than $48,000. As with the government incentives, the employer contributions will become tax free if your level of income allows it. It was the last National government who placed the tax on employer contributions.

It is interesting to see how any capital gains tax will effect kiwisaver balances in the future because a lot of these funds do have investments in property. It may well affect the supply of housing because would be property developers will think it is just not worth the hassle especially with the new compliance costs which will cost land lords an arm and a leg.

A capital gains tax will not just affect property and shares. It is likely to affect crypto currency as well but it is not clear what the situation is in the event that someone makes a capital loss as can happen when investing for capital gain. Investor’s who lose money in an investment in this way may well be able to claim losses against their wages and salaries but it is best to seek advice from a qualified person in this regard.

www.robertastewart.com

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MESSAGE TO INVESTORS-“Don’t Panic.”

Important not to panic during sharemarket drop

It is important not to panic when the markets are falling as has been the case recently. Whether you have a grand or two in shares or have 1000s invested in the sharemarket, it is best to ride it out the storm and just let the markets bounce back in your favour as no doubt they will. That is if you had followed the basic rules of investing.

The most important rule is to never invest in the markets money which you cannot afford to lose. If you are saving for a house then the sharemarket is not the place to invest your money-you should instead go for more conservative investments. The worst thing that can happen if you had invested your house deposit money in the sharemarket is to find that the value of your investment is reduced when it comes time to withdrawing your money.

If on the other hand you were investing for your retirement then you can afford to take risks as this is a long term investment and you will be able to take advantage of the gains in the market which for decades have outweighed the falls. Some financial advisors would tell you to scale back to more conservative funds the closer you are to retirement but that all depends on how soon after retirement you actually need the money. This is particularly relevant for those with kiwisaver accounts (NZ retirement savings scheme). (Not necessarily applicable in your own country).

It is also important to diversify your investing so that your risk is spread out over several companies and industries. If you have the means to play the market directly then this is the most important rule to follow. It will help you to withstand a sharemarket down turn better because some companies fare better than others during an economic downturn.

This week’s sharemarket down turn is a timely reminder to exercise commonsense when investing money by not placing all of your eggs in the one basket and to ride out the storm.

This article is not intended as financial advice but rather is the sole opinion of the writer.

Bob

www.robertastewart.com