Barefoot Investor Scott Pape explains why you shouldn’t listen to your parents on share market
Barefoot Investor author Scott Pape has urged young Australians not to listen to their panicked parents when it comes to the stock market.
Writing to the best-selling financial advice writer, Sarah, a 21-year-old investor, explained that her parents were concerned about falling stock prices and wanted her to sell to minimize the losses.
“I put $50,000 – my savings – into diversified high-growth index funds last year when values hit historic highs,” she told Pape.
“Now everything is starting to crash, and my parents have encouraged me to sell my stock and put the money in a savings account before it falls further (if I did, I’d make a loss of at least $7,000).
“I had originally invested this money for the long term, with the aim of selling the shares in five to ten years.
“Do you think my parents have the right idea?”
Barefoot Investor author Scott Pape has urged young Australians not to listen to their panicked parents when it comes to the stock market
But Pape advises Sarah to avoid panic by selling her stock, arguing that it’s better to invest for the longer term, pointing out that mothers and fathers wanted to “cocoon” their children against risk.
“No, I don’t think your parents have the right idea,” he said.
“Your parents love you, and they want to protect you from the risks of the big bad world.
“And as a parent, I totally understand their motivation.”
The benchmark S&P/ASX200 has lost 7.6 percent of its value since it peaked at 7,628.9 points last year, while the index now stands at 7,046.9 points.
Tech stocks in particular have fallen with buy now pay later app Zip Co dives from $12.35 in February 2021 to just 95 cents as of Tuesday.
Blue chip shares have fallen much more modestly with Commonwealth Bank, Australia’s largest mortgage lender, seeing its share price plummet from $109.71 in November to $98.96 today.
Much of that 9.8 percent drop has happened since the Reserve Bank began raising rates in May, ending the era of record-low cash interest rates of 0.1 percent.
Four consecutive monthly increases in spot interest rates have marked the fastest pace of monetary policy tightening since 1994, with inflation expected to hit a 32-year high of 7.75 percent this year.
Sarah initially wanted to invest young, live frugally and retire early as part of the FIRE (financial independence with early retirement) movement.
Pape said investors should brace themselves for a major plunge in the stock market.
Writing to the best-selling financial advice writer, 21-year-old investor Sarah explained that her parents were concerned about falling stock prices and wanted her to sell to minimize the losses (pictured are digital screens at the Australian Securities Exchange in Sydney)
“This is important: The really important life lessons — that shape you — happen when things don’t go the way you planned,” he said.
Recent stock market crashes
2020: Benchmark S&P/ASX200 fell 32.5 percent between February 2020 and March 2020 – from 7,139 points to 4,816.6 points – but hit a new all-time high in May 2021 after interest rates were cut to a record low of 0.1 percent
2008: During the global financial crisis, the S&P/ASX200 peaked at 6828.7 points on November 1, 2007.
On March 6, 2009, during the global financial crisis, it had fallen 53.8 percent to 3145.5, taking another decade to reach the previous record
1987: Before the 1987 crash, the All Ordinaries peaked at 2376.88 on September 21, 1987. After the Black Monday crash of October 19, 1987, it plummeted by 49.2 percent on February 10, 1988, only surpassing its old peak on February 27. Dec , 1996
“And Sarah, you have one now.”
The start of the pandemic in March 2020 was a particularly traumatic time for investors, as the S&P/ASX200 lost a third of its value in just four weeks, with the index plunge from 7,139 points to 4,816.6 points.
Pape said investors should brace for an even bigger decline.
“There is a good chance that the value of your stock will fall by 50 percent at some point,” he said.
‘That is the price you pay for a high long-term return.
“So buy stocks the same way you buy clothes: if you calculate that prices are down and stocks are on offer, get excited and buy more.”
The S&P/ASX200 in May 2021 surpassed its pre-pandemic peak in February 2020, a remarkable reversal from the March 2020 low in just 14 months.
But past recessions have taken much longer to recover from.
The global financial crisis took nearly 12 years to recover, surpassing the November 2007 peak in the ASX200 until July 2019.
The Black October crash of 1987 took nine years to recover.
Online broker CommSec has forecast a seven to nine percent decline this year against the benchmark S&P/ASX200 index, despite forecasting a modest five percent increase for 2022 in January.
The earnings season has also made investors nervous, as CommSec noted that more S&P/ASX200-listed companies reported their results had fallen in price.
Blue chip shares have fallen much more modestly with Commonwealth Bank, Australia’s largest mortgage lender, seeing its share price plummet from $109.71 in November to $98.96 today. Much of that 9.8 percent drop has happened since the Reserve Bank began raising rates in May, ending the era of record-low cash interest rates of 0.1 percent.
“As a result of the uncertainties ahead, investors have been understandably cautious about the results,” the report said.
“There are more companies that saw their share prices fall on the day of the earnings release than the companies that made a profit.”
A CommSec analysis by economists Craig James and Ryan Felsman noted that of the 78 companies in the S&P/ASX200 that reported earnings, a minority, or 43.6 percent, reported flat or higher results on the day of the announcement.
The average daily loss was 0.3 percent, although 63 percent of companies reporting so far had seen an increase in profits.
High inflation, the Russian war in Ukraine and supply chain challenges had eroded companies’ cash balances, causing shareholders to see their dividends cut.
“When assessing earnings seasons, the general term used to describe results is ‘mixed,'” CommSec said.
‘And that makes sense, because there are all kinds of influences on companies.
“And while some influences are positive for some companies, such as labor demand and rising interest rates, they are negative for others.”