Echoes of 2008 financial crisis as stock markets ravaged by panic

exposure to oil giants BP and Shell, was badly hit but the escalation of the Covid-19 crisis weighed on other regions as well.

As markets began their downward journey in earnest on Feb 19, the overwhelming advice was to stay calm and “buy the dips” – add money to stocks and funds that have fallen in value as they trade more cheaply. But the mood has changed as a result of the oil collapse and extreme disruption caused by the virus.

Markets are in turmoil and even investment professionals have turned more pessimistic. The outlook for trade and the global economy has become increasingly bleak.

‘THE WORST IS YET TO COME’

The price war between Saudi Arabia and Russia that caused the oil price slide is likely to result in an era of sharper swings in the stock market.

Chris Beauchamp of IG, a broker, said the oil sector would continue to drag down British stocks for a while yet. “The oil price has yet to find a floor, so share prices have not done so either,” he said. Vincent Ropers of Wise Funds, an investment firm, said in normal times a fall in oil prices would be seen as the equivalent of a tax cut for the broader economy. “Of course, we are not in normal times and the announcement was made against a very unfortunate backdrop of coronavirus,” he said.

‘WHAT SHOULD I DO ABOUT IT?’

No matter how scary recent developments are, for investors with a time frame of 10 years or more the recent market moves should not trigger selling.

Those who can leave money invested should be encouraged by the fact that markets tend to recover from lows very quickly. Since 1969, a downward market has lasted, on average, 385 days, losing investors around 37pc of their money. However, the average upward market – which starts immediately after the downward trend ends – lasts 1,482 days and returns investors more than 140pc.

People with spare cash have been dipping into markets to buy good companies at lower prices. According to Interactive Investor, a fund shop, 90pc of all trades on Monday, when the FTSE 100 dropped by 7.7pc, were buys.

On the same day, Freetrade, an online stockbroker, recorded its highest number of new customer registrations. AJ Bell, the fund shop, had its busiest trading day ever. BP and Shell, the biggest fallers on Monday, were the most-bought stocks by customers of Interactive Investor and AJ Bell that day.

However, Brian Dennehy of Dennehy Weller, a financial advice firm, said this was a “lazy and dangerous response”. He suggested placing a “stop-loss” on your investments – a mechanism that automatically sells when a holding falls below a certain level. Stop-losses are provided by most brokers.

Those who have not done this have two main options: hold on and hope stocks recover or sell and sit on the cash. Somewhere in the middle is to drip-feed money back into markets on a monthly basis. Spreading out investments will mean investors buy stocks at a range of different prices so it smooths their returns, according to the “pound cost averaging” theory.

Pensioners face a greater risk. In retirement, investors often rely on the income generated by their pension, but by continuing to withdraw fixed amounts each month they risk compounding losses that could have been made back if they had kept the money invested.

The damage done is sometimes called “pound cost ravaging”.

‘RIDE OUT THE PANIC’

The past week’s market falls drew inevitable comparisons with the 2008 financial crisis, when the London stock market lost 31pc in two months. However, those who managed their savings through the last crisis and the current one urged other investors to stay calm.

Telegraph Money reader Harry Sheldon, 62, said savers needed to grin and bear the current slump. “Anyone still in the market has already missed the boat on selling out,” he said.

“Forecasting what will happen next is a fool’s game. Markets could take a year to recover or could be back by September.”

As an income investor who lives off dividends, Mr Sheldon has used falling markets to buy shares in Aviva, the insurer, on the cheap and at a yield of around 8pc.

“They’ll probably be hammered by claims for cancelled travel plans because of the coronavirus, but it was too good an opportunity to pass up,” he said.

Simon de Laat, 60, another income investor, is sitting tight, just as he did in 2008. “Anyone buying back in now risks further losses,” he said. “No one knows what will happen. At some point it will reach a bottom, but it is impossible to know when.”

He recommended that investors avoid logging in to their broker accounts to minimise the psychological burden of losing money.

Mr de Laat said the current crisis had similarities to 2008’s: “The herd mentality has been the same, despite the cause of the market sell-off being completely different.”

He said the British Government was approaching the crisis in the right way but was worried that President Trump in America might undo any good work.

“If anyone can throw petrol on the fire, it is him. He is the one thing that worries me,” he said.

David Dundas, 78, invested through the dotcom and 2008 crises and said the lesson he learnt was to invest only in companies he truly understood.

Mr Dundas, a scientist, bought pharmaceutical companies and green energy companies. As a result, his portfolio has not suffered much this year.

“I learned hard lessons from the dotcom crash and I won’t touch technology. There are better companies out there, like those involved in the transition from fossil fuels,” he said.

‘At some point it will reach a bottom, but it is impossible to know when’