How to avoid depression after a crash

What goes up can come down again. Shares are no exception
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The Independent Online
It may seem odd, at a time when share prices are roaring ahead, to write about the opposite side of the coin. It is a word stock market investors do not like to hear - crash. However, we have to face reality.

Even though they may be reaching record highs here in London, the price of shares do plummet from time to time - as Far Eastern markets have amply demonstrated. It is not a pleasant experience to see your capital evaporate into thin air but there is not a great deal one can do about it. The golden rule is not to panic.

Ask anyone to name two stock market crashes and inevitably they will respond, "Wall Street 1929; Black Monday 1987". These are certainly the best-known cases when shares "fell out of bed". However, they are by no means the only or the first two cases. Inevitably, in the future there will be further upsets.

England's first stock market crash was in 1720 when the South Sea Company went bust. In 1745, a fall in share prices was triggered when the Jacobite forces of the Young Pretender reached Derby. Now forgotten is the run on the London bank Pole & Company in 1825, resulting in a financial crisis of such proportions that it was said England was only a day away from a barter economy. Then last year, all the world's stock markets took a tumble when markets in the Far East crashed.

Contrary to legend, the Wall Street Crash of 1929 did not result in stockbrokers throwing themselves from Manhattan's skyscrapers. However, Wall Street did fall by 13.2 per cent on 29 October 1929 and the Great Depression started. An even greater fall was experienced on 19 October 1987, more commonly referred to as Black Monday. Shares fell on Wall Street by 25 per cent. In London, prices fell by 10.6 per cent, cutting more than pounds 50bn from the value of shares. The following day prices fell a further 12 per cent. By 9 November, the London market had fallen 32 per cent.

Statistics, of course, do not tell us how badly private investors were hurt. As the crash came at a period when the government was encouraging wider share ownership, many investors who had purchased shares relatively recently did lose large sums. So, too, did speculators in penny shares.

The speed of the crash resulted in everyone being taken by surprise. Phone lines to brokers quickly became jammed and it was virtually impossible to sell shares on the first day and very difficult on the second. Those who were successful in getting through had to wait weeks for the proceeds, for brokers could just not cope with the administrative burden.

Investors in unit trusts fared no better. Some management groups temporarily suspended dealing while others, allegedly, did not answer their telephones. Unit holders who did manage to sell discovered that they did so at the "cancellation price", which is the lowest price allowed by the regulators for the re-purchase of units.

Unlike the 1929 crash, investors did not have to wait a long time to see the market recover. Indeed, 21 months later the Footsie was back to its pre 19 October 1987 position. Although the market ended the year higher than when it began, this was not comforting for many investors.

Anyone who bought shares at the top of the market in July 1987 had to wait five years before the prices of their shares substantially rose above the price at which they were acquired. So, what can we learn from all this?

The golden rule is only invest "capital" in shares. In other words, you must have a reasonable level of savings before you even think about the stock market.

n Ideally the equivalent of three months' income should be kept in an instant access savings account. Additional "comfort" funds should be kept in a notice account for emergencies. Certainly, do not place money you are saving for a future planned expenditure into shares.

n Shares are not for everyone. If fluctuations in share prices are likely to cause you sleepless nights, then think about "safe" investments such as interest bearing accounts or "guaranteed" investments that pay a bonus at the end of five years if the stock market does well and returns your money in full if it does not.

n Remember the stock market must be viewed as a medium to long-term investment - that is for at least five years.

n If the market plunges, do not panic. Providing all the economic fundamentals are right and you have shares in good companies, all will hopefully come right in the end.