The cyclical nature of economic development is one of the indispensable features in the functioning of a market economy, when periods of take-off alternate with a temporary loss of market conditions. At the same time, there are relatively regularly recurring fluctuations in business activity. Crisis situations arise when a period of growth is replaced by a period of deep recession. The crisis can be caused or aggravated by military actions, natural disasters and events from the field of geopolitics. In the last century, 20 serious crises in the economy were recorded.
The instability of the crisis situation and high risks slow down investment processes, since it is almost impossible to predict the timing and scale of economic recovery. However, there are many examples when it was crisis situations that helped to earn primary capital or multiply existing ones. Therefore, entrepreneurs with experience consider the crisis to be a time of new opportunities.
The stock markets are a little more serious. It takes about 4 months for the stock market to recover its positions after a fall of 10-20%, but a decline of 20-40% will be followed by a recovery period of 15 months. Four years are needed to restore the stock market’s position after a 40% collapse.
A history of ups and downs
Research in this area was conducted by the group of Ned Davis. It took a period of just over 60 years, starting from the events of World War II, when the Germans captured France, and ending with the collapse of world stock exchanges after the events of September 11, 2001. During this time, there were 28 global crises when the market reacted with a rapid decline, but soon recovered. And those who tried to get rid of seemingly illiquid assets as quickly as possible, later had to buy them back at a completely different, higher price. So enterprising people earned a lot of money from the crisis, panic and resale of assets.
A good example is the reaction of the stock market to the attack on Pearl Harbor in the winter of 1941. Then immediately there was a drop in the S&P 500 index by 4%. This decline continued for several more months to 14%. But then the situation began to change dramatically: an annual growth of 25% began to be observed, despite the ongoing hostilities, however, already in other territories.
Why do most investors act irrationally in a crisis?
During crises, people succumb to panic moods and often cannot correctly assess the situation. They begin to behave irrationally, succumbing to emotions. There is even a theory that people are more prepared for losses than for risk.
Securities at this time are sold at an undervalued price. Perhaps for someone such losses are not so significant, but the fixed capital remains. Of course, excessive risk in a losing position is also not an option. Often such decisions, which have no valid grounds, only increase the scale of losses.
How should an investor act in a crisis?
First of all, turn on rational thinking and soberly assess the situation. Perhaps, in your case, the decline in asset prices is a signal not to sell them quickly until the fall has accelerated, but, on the contrary, to buy while there is such an opportunity, which does not require large investments.
Often assets are devalued not by the fact of their complete lack of demand on the market, but by the situational situation. After some time, the market recovers and prices return to normal. Of course, investing in a crisis is a process that requires discipline, patience and, of course, the necessary amount of liquid assets that could be invested in promising acquisitions.