The year 2008 seems a long time ago and a lot in the world has changed since then (I have less hair for one). But something that hasn’t changed is the volatility on the stock market. It was very high in 2008, and as we stand now, it’s volatile again.
At the end of 2008, the FTSE 100 index had fallen 31% during the year, making it the worst performance on record. As of Friday, the FTSE 100 index was down 28% for 2020. There are several other similarities that investors like myself can see in the last large downturn in the markets. And there are lessons that can be learned from it too.
V-shaped recovery
This phrase has started to be used over the past week regarding the stock market. In essence, there’s a strong likelihood that when the recovery comes after we hit the bottom, it will be in a V style. The first part of the V is the sharp downward sell-off, followed by the second half of the V, which is the sharp bounce-back.
This was what we saw in 2009 when, after the fall in 2008 to end around 4,200 points, the FTSE 100 rallied to finish 2009 at around 5,300 points. If we see such a move again this year or next year, it means investors will be wise not to sell their shares now so they don’t lose out on the bounce-back when it happens.
Fear vs greed
These two emotions are the most powerful in investing, and can lead us to make irrational decisions to buy or sell. This was seen during the crash in 2008 when investors panic-sold to such an extent that market limits were triggered. For example, in the US, trading halts for 15 minutes if there’s a fall of 5% or more to enable participants to pause and regroup.
This year, we’ve seen the same thing happen, with large moves causing panic-selling. I’m making sure that I don’t follow suit as such emotional reactions will make me a worse investor. The market can be oversold easily and I know I shouldn’t sell when the market is undervaluing a stock I hold and really believe in. Rather, I should hold on to the stock and base my actions on the fundamentals surrounding the firm instead.
Buying opportunities
My last lesson is arguably the most important. Back in 2008, there were some incredibly good buying opportunities. I remember a good friend of mine at the time buying stock in Lloyds Banking Group when the share price was 29p, which he sold two years later at around 70p!
You might have other stories about great buys during 2008, with firms being severely undervalued. Again for 2020, there are some firms that in my opinion offer longer-term investors some great potential returns. My Foolish colleague James McCombie digs into the investment case for one such share (RELX) here.
An important disclaimer is that you can never pick the bottom of the market. Some who invested in early 2008 had to endure large unrealised losses before the market bounced back. This may be the same for 2020, and we may have further downside ahead. However, there are many stocks trading at prices today that I think undervalue them. So buying now for the longer term and not being fearful is my strategy.
