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On Monday, August 5, the Australian Securities Exchange (ASX) saw a nearly 4% decline, raising concerns among investors about how to safeguard their portfolios in the face of a potential market downturn.
A stock market crash, often defined as a sudden drop of at least 10% in share prices over a short period, can trigger anxiety. This event can either be temporary, with a quick recovery, or signal a prolonged period of lower market performance, as seen during major crashes like Black Monday (1987), the dot-com bubble burst (2001-2002), the global financial crisis (2008-2009), and the COVID-19 pandemic (2020).
Several factors can contribute to a market crash, including shifts in investor confidence. When market participants start questioning the overvaluation of companies, panic selling can result, leading to a chain reaction of falling prices as more investors opt to sell.
Recent global events reflect the impact of such market movements. In the US, employment figures hit a three-year high, but disappointing earnings from major tech companies spurred stock sell-offs, especially in sectors focused on artificial intelligence. The tech-heavy Nasdaq composite index dropped 2.43%, while the S&P 500 fell 1.84%. Japan experienced significant fallout, with semiconductor companies seeing share prices plunge and the Nikkei index suffering its worst day since 1987, down 12.4%. European markets followed suit, with the Stoxx Europe 600 index and the FTSE 100 also declining.
Russ Mould, investment director at AJ Bell, suggests that this volatility could either be a temporary storm or a sign of a more bearish market sentiment. Meanwhile, investment strategist Lindsay James points out that despite the turbulence, the long-term outlook remains promising, with opportunities for globally diversified, multi-asset portfolios to benefit from more favorable entry points during periods of volatility.
Market history shows that crashes are part of the natural cycle, with sharp declines occurring every eight to 10 years, followed by eventual recoveries. For instance, while the dot-com and global financial crises led to deeper downturns, more recent falls, like those during the pandemic, saw quicker recoveries, with the FTSE 100 bouncing back within two years.
Vanguard highlights the importance of remaining invested over time rather than attempting to time the market. A long-term approach, such as reinvesting dividends, has historically yielded significant returns. For example, a $10,000 investment in the Australian market over 30 years could grow substantially, with the S&P/ASX All Ordinaries Total Return Index demonstrating a 9.2% average annual return.
While it may be tempting to attempt to sell investments before a crash and repurchase them at lower prices, timing these moves is challenging, even for professionals. For most investors, a consistent strategy of staying in the market offers a better chance of weathering the ups and downs.
