Why the stock market crash could be the buying opportunity of a lifetime

While some UAE residents are cashing in on lower equity prices, those new to investing should tread more carefully

A trader wearing a mask as he works on the floor of the New York Stock Exchange before the building closed indefinitely due to the coronavirus outbreak. Shares have crashed by around a third since CovShow more

While most private investors are horrified to see share prices crash, as this hammers the value of their pensions and investments, others have a different approach.

Instead of getting upset as global indices crash by up to a third, they see now as an opportunity to buy shares at much lower prices than before.

It may sound counterintuitive, but there is sense behind the strategy, which has the backing of the world’s most successful investor, US billionaire Warren Buffett.

He famously said that investors need to be “greedy when others are fearful, and fearful when others are greedy".

With investors now fearful, his mantra suggests this is the time to be greedy for bargain-priced stocks. The aim is to buy and hold for the long term, giving them years to recover their value. So, should you buy today?

Elie Irani, 45, from Lebanon, who has lived in Dubai since 2006, says most of us like buying things when they have fallen in price, but shares are a rare exception.

“People get excited when, say, their favourite smartphone is selling at a discount, but freak out when the stock market is down 30 per cent,” he says.

Mr Irani, who works for a cybersecurity company and is a member of SimplyFI.org, a non-profit community of UAE investment enthusiasts, says investors need to keep cool heads, because markets have been here before.

They fell during every other major pandemic, including the 1918 Spanish flu, Sars, swine flu, Ebola and Middle East Respiratory Syndrome (Mers), but always recovered. "Why should this time be any different?” Mr Irani asks.

Shares may have crashed by around a third since Covid-19 took hold, but in the dot.com crash in 2000, and financial crisis of 2008, they fell by half.

The market is not particularly cheap, by historical standards. Before the crisis, the S&P 500 traded at around 33 times earnings, an even higher valuation than before the Wall Street Crash, according to the Shiller PE Ratio.

By close of trading on Friday the index had fallen to 24 times earnings, but that is still higher than its long-term mean of 16.70 times earnings. In previous downturns, the Shiller index has fallen into single digits.

Mr Irani is rebalancing his portfolio of low-cost global exchange traded funds (ETFs) by selling a chunk of his bond holdings, which have risen during the crash, and using the profits to top up his equity funds, which have dropped. Effectively, selling high, and buying low.

Another SimplyFI member, Mauricio Moura da Silva, 43, is planning to invest a sizeable lump sum to benefit from today’s low prices.

The French-Brazilian IT consultant is spreading his money across three low-cost ETFs: iShares Core MSCI World UCITS ETF, which invests in developed world equities; emerging market fund iShares Core MSCI EM IMI UCITS; and iShares Core Global Aggregate Bond UCITS, which tracks a global portfolio of investment grade bonds.

“I am investing for the long run, so if markets fall further after I have invested, that doesn't worry me much," says Mr Da Silva, who has lived in Dubai for four years. "Over time, I should end up nicely ahead.”

If you are wondering whether to follow their lead and invest in today’s hyper-volatile market, remember that both these investors are enthusiasts, who know the risks as well as the rewards, and are willing to take them.

You should only ever invest money in equities that you won’t need for at least five years, and preferably several decades, as part of a strategy to build long-term wealth for retirement. Older investors who are closer to drawing their pension should be cautious, as they have less time to recover losses.

Stuart Ritchie, director of wealth advice for AES International, warns against trading to make a short-term gain. “When the market goes down more than 20 per cent, it takes more than 500 days to recover on average. Only invest if you take the long-term view," he says.

Do not panic and sell, either. That will only lock in your losses, and bar you from the subsequent recovery.

"If you had cashed out last Monday, for example, you would have missed on the subsequent three-day rally, which saw the S&P 500 climb 20 per cent,” says Mr Ritchie.

Any attempt to second-guess market movements will backfire, the best strategy is to sit tight and see it out, he adds.

Christopher Davies, chartered financial planner at The Fry Group, says if you plan to leave your money in the market then short-term volatility is nothing to fear, but should be seen as a natural part of the market cycle.

Those planning to invest new money must accept that they are exposing their capital to extreme volatility. "Just because the market has gone down, doesn't mean it won't fall further," Mr Davies says.

Do not overestimate your own tolerance for risk either: “If you lose your nerve after investing, you risk selling up before you can reap the reward,” he says.

Mr Davies says nervous investors should consider drip-feeding money into the market over several months, to avoid getting punished by another downturn. "The downside is that you will reduce the benefits of any market recovery in that time,” he says.

SimplyFI board member Demos Kyprianou says nobody should invest before building an emergency cash fund worth at least six months of spending. "If you do not have this safety net, or fear for your job, this is not the time to buy," he says. "You may need that money to survive.”

Accept that you will never get your timing exactly right, by buying at the absolute bottom of the market. “If the market is down 30 per cent, who cares if it has risen 3 or 4 per cent in recent days? You are still getting a big discount.”

Mr Kyprianou recommends balancing your equity holdings with bond funds. "If you are young, you might want 80 per cent in stocks and 20 per cent in bonds. You could increase your bond exposure to 40 per cent, as you near retirement.”

A simple method is to combine a global equity fund such as Vanguard FTSE All-World UCITS ETF with the iShares Global Govt Bond UCITS ETF, he says.

If the idea of investing in this market gives you sleepless nights, don't do it. The crash could have further to run.

Instead, Mr Kyprianou suggests you watch the market and learn. "There will be other crashes. Just be ready for the next one," he adds.

Also, some investors may have other financial priorities such as paying down debt, or simply covering their bills until the crisis passes.

Warren Flay, 58, from New Zealand, who has lived in the UAE for nine years, is keen to take advantage of relative US dollar strength against his home currency, the New Zealand dollar. “We are shovelling money into the mortgage on an investment property back home, to shrink it before the Kiwi recovers,” he says.

When that opportunity passes, Mr Flay, who works as a health and safety audit trainer, will turn his attention to the stock market.

Meanwhile, orthodontist and Simply FI member Karthik Jayakumar, 42, urges investors to stay calm at times and avoid rash decisions.

Mr Jayakumar, an Indian national who has lived in the UAE since 2003, says constantly tinkering with your portfolio does more harm than good. "It's like baking a cake, if you keep opening the pan, you are going to spoil it,” he adds.

If you already invest a regular monthly amount, keep that going if you can, and consider investing a one-off lump sum if you have money to spare.

Just make sure you can leave the money invested for the long term, wherever today’s market madness goes next.