(BFM Bourse) – Guest of BFM Business Grégory Guilmin, founder of “La Bourse: make it easy”, gives his advice on what to do in a stock market crash situation.
The stock markets have had a string of peaks since the start of the year, including the Paris Stock Exchange with a CAC 40 index which gained nearly 8.8% over the first three months of 2024.
After the excitement of the summits, should we now fear a crash in the world’s financial markets? Grégory Guilmin, founder of “La Bourse: make it easy”, who was a guest of Lorraine Goumot on BFM Business, answered this question in Tout pour Invest on April 3.
According to the specialist, episodes of stock market crashes are an inherent part of the history of financial markets. “The stock market is not an exact science, so it is impossible to predict when this crash will happen. But when I see so much optimism on the financial markets, I like to regularly remind people that we must not forget the stock market crashes. We remember the stock market crash of 2020 where after 4 weeks the market rebounded (which) was in hindsight a small crash. Since the year 2000, the financial markets have experienced 2 major stock market crashes. This is important to be ready,” he warns.
What is a stock market crash and a bear market?
Grégory Guilmin gives his definition of a stock market crash. This market event “represents a fall in a stock market index, of a minimum of 20% between its highest point and the subsequent lowest point”.
To illustrate this movement, Grégory Guilmin based himself on the significant drop in 2020 in the American S&P 500 index which represents the 500 largest American stock market capitalizations. “Between February 19 and March 23, 2020, the stock market fell by a little more than 34% in just over 4 weeks. In this scenario, we were in a situation of stock market crash, or bear market “, he recalls.
The American markets have certainly experienced 36 crashes between 1900 and 2021, but these events, which are part of the history of the financial markets, fascinate investors. “Stock market crashes attract crowds because we play on fear. When we talk about a stock market crash, that potentially implies a more or less significant loss in investments,” recalls the specialist.
According to Grégory Guilmin, this fascination is therefore linked to the general public’s aversion to losses. “The pain felt by losses is twice as intense as the pleasure felt by gains.” If you lose 100 euros on the stock market, you will have twice as much pain as if the day after tomorrow you gain 100 euros on the stock market,” he says.
This behavioral bias is at the origin of the fascination with stock market crashes. The unpredictability of this market event also maintains the myth surrounding stock market crashes. “We know that a stock market crash will happen one day, but we do not know when and through what channel. No one could have predicted in 2019 that there would be a stock market crash linked to the first confinement and the Covid pandemic -19. Obviously, there were birds of ill omen in 2005, 2006 who predicted the subprime crisis.
“We can wonder about certain bubbles but we don’t know if they will eventually burst. And if so when it will burst? It is therefore impossible to predict such an event,” he continues.
A stock market crash often synonymous with recession?
But is a stock market crash linked to a degraded economic situation? Grégory Guilmin debunks this preconceived idea since, according to him, the two are not necessarily linked. “When we take the case of 2020 with a market which fell by more than 30% in 4 weeks, we were not in a situation of economic recession. Slowdowns in the economy did indeed follow but at the time of the fall in markets, global economic growth was positive in 2019″,
“Sometimes there are economic recessions, but there are interventions by central banks which support financial markets on the rise,” explains Grégory Guilmin. Conversely, the specialist recalls that market exuberances are subject to correction, which causes stock indices to fall by more than 20%. However, this fall will not always undermine the drivers of growth, namely household consumption and business investment.
Stay patient and calm
A stock market crash lasts on average 10 months, so what should an investor do in the event of a stock market storm?
“The first piece of advice is to continue to invest wherever possible, every month on the platform of your choice and in an automated manner. This helps limit the emotional impact, and on the portfolio. Also, it is It is better not to look at your stock market portfolio every day, this will bring you nothing, except fear, anxiety which can make you make drastic decisions. With a lot of fear, you can be tempted to sell, which can be the worst decision”, advises Grégory Guilmin.
“Third point, if you are invested it is also to detach yourself from continuous financial information, which can be a source of anxiety and push you to press the sell everything button,” he continues.
This emergency behavior can also keep the investor away from rebound opportunities. “On diversified indices, there have always been rebounds. Also, when you sell after a loss of 20%, 30%, 35% or 40% you anchor in your head a very negative memory linked to the stock market. You will therefore having a negative emotion linked to the Stock Market, which will no longer encourage you to invest in the future. However, it is your emotions which pushed you to sell”, he concludes.
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