Hangovers and Stock Market Crashes

Do you remember your very first hangover?

After a night (or day) of drinking and revelry, you woke up the next morning wondering if you were going to die. Your head was pounding, the world was spinning, and you swore at that moment you were never going to drink again.

Of course, most of us do drink again not long afterwards, because we understand that hangovers don’t last forever.

Sure, we might still suffer from a hangover every few years after a big night out, but over time we’re aware that if we choose to drink more than a couple of drinks in a row, we’re going to feel the after-effects in a small or a big way the next day.

Hangovers are our bodies natural mechanism preventing us from overindulging regularly. You might argue that hangovers are cyclical like that.

Not unlike the share market.

If this is your very first experience of a market crash as a new investor, chances are you’re feeling a little like you did when you experienced your very first hangover. You feel a bit sick, you feel like your world is spinning and some of you might even be saying, that’s it, I’m not investing ever again.

However, what I want you to understand, is that market crashes, just like market peaks, are cyclical. You can’t have one without the other. Just like you can’t have a night of drinking without the eventual dreaded hangover.

I mean, if all we ever experienced was stock market peaks, the market would be a giant bubble of overpriced and overvalued stocks. Because the stock market doesn’t live in its own silo or bubble, this would affect our economy which would suffer from unsustainable growth, meaning high inflation and higher interest rates as governments tried to slow it down.

All things we’ve experienced recently. All things none of us want.

Instead, crashes are the market’s natural corrections, keeping the market balanced and realistic.

Of course, the recent market crash was because of a most unnatural person (or reason), being Donald Trump and his tariffs. But an ‘unnatural’ rebalance isn’t unusual or unprecedented. If we look to tariffs alone, we saw the market crash in 1930 as a result of US President Hoover’s tariffs. But we can also look throughout history and see crashes that have been as a result of other ‘unnatural reasons’ such as war, pandemics and more natural reasons such as tech bubbles and recessions.

What is important, is reframing and understanding the cyclical nature of the share market so that you aren’t tempted to sell and jump out, but rather to become a balanced investor.

Research shows that women particularly do this best. We trade less often, we hold longer and as a result, over time, we achieve a better result than the index (and the blokes.)

That’s because a balanced approach to investing is buying regularly regardless of peaks, troughs, stagnation or whatever the market is doing understanding that over time the average cost of your investments will be worth it.

There will always be people encouraging you to buy more, to time the dips and then afterwards crowing about how they’ve timed the market. They’re not geniuses, most are just lucky. I know this because most investment fund managers – genuine finance experts – cannot time the market. In fact, they cannot even beat the index.  Don’t believe me? For the last twenty years, the S&P Dow Jones Indices has provided scorecards to determine which managers of 2,132 active mutual fund managers have performed. Over the twenty years, less than ten percent of active US funds have managed to beat the ‘benchmark index’ which is essentially how the broad stock market has performed.

But in the last five years? Not one single fund manager has beaten the market successively over those five years. Not one.

That’s why, it’s about quieting the noise and maybe even applying some distance between eh news headlines and you if you’re tempted to emotionally react to what’s going on.

It’s about understanding that it’s about time in the market, rather than timing the market.

Or, if we put it in the language of drinking, you might also think of it as investing responsibly.