Can you profit from stocks carnage?

There’s a pandemic on the loose, a reality TV star in the White House, and negative interest rates looming.

No wonder the markets are bricking themselves. The volatility has shattered every historical record, with massive plunges followed by occasional huge rallies.

So, what’s an investor to do? This is kind of a trick question. If you’re trying to decide now, it’s too late. Your amygdala is soaked in a marinade of fear and excitement. Coming up with a ‘strategy’ in the midst of the mayhem will almost certainly end badly.

Much better to stick to the contingency plan you made during the 10 years of relative calm. To quote last year’s column on this topic:

‘‘When the crash comes – and it will come – can you brave a 30 per cent decline without flinching? What if it happens in the space of a couple of days? How will you sleep at night? Do you have an ulcer? Do you want

‘During the global financial crisis, those with steely nerves kept investing every month.’

one? Visualise this scenario as accurately as you can, and be honest with yourself.’’

OK, some of you didn’t make a plan. But all is not lost! There are basically two main courses of action, which hinge on your investing timeframe:

‘‘Less than five years: what the heck are you doing in the sharemarket? Less than 10 years: still a bit iffy.’’

For those who ignored this advice, which has been repeated ad nauseam since the dawn of time – there is no ‘good’ strategy for getting out in one piece. Sorry.

Anyone with a short investing timeframe is now in the unenviable position of having to time the market. At the time of writing, the NZX was down 20 per cent. That’s one year’s worth of gains erased – a major blow, but not disastrous, in the context of a decade-long bull run.

If you sell out now, you lock in that loss, and potentially miss out on the rebound. Maybe this is as bad as it gets. But maybe not: markets fell 56 per cent in the last crash, and 86 per cent during the Great Depression.

What will happen? I have no idea, and anyone who claims to know is lying or deluded. Yes, a few lucky souls will perfectly nail the timing of both the exit, and the re-entry. But most people get wrecked. If this is a decision you have to make, good luck.

For those of us playing the long game, the picture is rosier. All we have to do is keep doing what we’ve always done: invest steadily month in and month out, and pay no attention to the volatility.

Investors make serious money when the streets are running red. Current stock prices looked like incredible bargains as recently as three weeks ago; they will almost certainly look like bargains again.

During the global financial crisis, those with steely nerves kept investing every month. By the time the market finally clawed its way back to neutral ground, they were sitting on a 31 per cent return. A year after the recovery, those stocks had returned 51 per cent. Three years later, they were up 89 per cent. And today – even while the world feels like it’s about to implode – those shares have almost tripled in value.

I suggested last year that anyone too nervous to play this game – who didn’t want that stomach ulcer – might take some money off the table, or switch to a more balanced portfolio. If you didn’t do so at the time, you might as well buckle up.

This virus has exposed all the usual silent risk that accumulates during boom times: corners cut, dodgy debts, and arcane financial instruments. But these things will wash out, and the shutdown won’t last forever.

Going long on stocks is essentially a bet that humans will continue to steamroll over every disease, war, and crisis that stands in the way of creating wealth.

Will we ever surpass the prepandemic peak? Judging by every other time markets have crashed – including a couple of world wars, and deadlier pandemics than this one – the answer is ‘yes’.

These next few weeks, months, or years will separate the girls from the women. Those who panic will get smashed. Those who are prepared to play the long game will almost certainly come out much wealthier than they went in.