In the wake of the recent U.S. military action against Iran on February 27, financial markets have begun to show signs of distress. By March 30, the U.S. S&P 500 index was recorded at 9.4% below its peak, indicating a notable downturn. However, this decrease has not reached the threshold for a market correction, which is defined as a drop of 10% or more from a high, nor has it escalated into a full-blown crash that signifies a decline of 20% or more.
Having invested since 1986/87, the author has weathered various market fluctuations, experiencing first-hand the effects of significant stock-market crashes over the decades, notably six in total, with three occurring since 2019. The initial major crash was on Black Monday, October 19, 1987, when the S&P 500 plummeted by a staggering 20.5%. Despite the immediate shock, the index ended the year slightly higher, teaching the lesson that sharp market declines can often be fleeting for long-term investors.
The bursting of the ‘dotcom bubble’ presented another pivotal lesson. Between March 2000 and October 2002, the Nasdaq Composite index experienced a catastrophic drop of 78%, emphasizing that overvalued assets face steeper declines when bubbles burst. Similarly, during the global financial crisis of 2007-09, the S&P 500 tanked to 666 points, instilling a sense of impending doom about capitalism’s future. Nevertheless, this downturn ultimately proved to be a significant opportunity for investors, as the S&P has since increased tenfold.
The COVID-19 pandemic induced an intense bout of panic-selling, with the S&P 500 and FTSE 100 dropping 35% in merely five weeks. Motivated by advice from renowned investor Warren Buffett, the author and their spouse adopted a strategy of aggressive investment, putting 50% of their wealth into stocks during this turmoil, which yielded transformative returns over time.
Throughout these volatile periods, a fifth lesson emerged: the importance of liquidity and diversification. Maintaining a cash reserve can provide security, and allocating funds across various investments helps to mitigate risk during crashes. The author’s portfolio now includes low-risk money-market funds as a protective measure.
Despite the overarching market trends, certain stocks have continued to decline. Diageo, the prominent alcohol producer known for brands like Guinness and Johnnie Walker, has seen its shares plummet 55.1% over the last five years, including a 30% drop in the past year alone. As of April 10, Diageo shares were valued at 1,441p, marking a significant decrease from their peak valuation at the end of 2021. Diageo’s sales growth has faltered since the post-pandemic surge, negatively affecting earnings and cash flow.
The author acquired Diageo shares at 2,806.6p each in January 2024 and is currently facing a 48.7% paper loss, excluding reduced dividends. Nonetheless, there is hope for recovery under the leadership of CEO Sir Dave Lewis, prompting consideration of increasing their investment in Diageo, with optimistic projections for a rebound by 2026/27.
In summary, these experiences showcase critical lessons from historical market crashes, emphasizing the value of resilience, prudent investment strategies, and the potential for recovery even in the midst of adversity.
