There's always something for the market to worry about.
And in the wake of the Greek referendum — which saw the people of Greece reject demands for reforms and budget cuts — the level of worry is higher than normal at present. Especially when you add in concerns over China's nose-diving sharemarket, plummeting commodity prices and an over-heated property market.
How do I know? At the time of writing, the ASX had fallen 1.8%!
Oh dear…
Long term, business focused investors — like us here at The Motley Fool — are usually pretty sanguine in the face of such worries. Sometimes to such an extent that you could think us irresponsible and and of touch.
So in the spirit of balance, let's play devil's advocate. Let's assume that the events currently unfolding lead to a global recession and sharemarket crash (and maybe they will). What does such an event look like?
From a general standpoint, we don't have to rely too much on guesswork. Though history never repeats exactly, these kind of things have happened before. As Mark Twain (supposedly) said; "history doesn't repeat itself, but it does rhyme".
The first thing to acknowledge is that there will undoubtedly be a lot of suffering. A lot of people will lose their jobs, and a good part of their savings and investments will be wiped out. On average, our standard of living will decline and there will be lasting social repercussions. Sadly, it will be those at the lower end of the socio-economic ladder that will be hit hardest.
Share prices will plummet — probably by a lot. So too will property prices. Rents and dividends will, on average, fall. The declines will continue for longer than most think, and any recovery to pre-crash levels will likely take many years. For many investors, the losses experienced will be permanent; either because of bankruptcy or investor capitulation (selling out near the bottom and not buying back in).
All in all, it won't be pretty.
But the pain won't be shared evenly. Not even close. There are those that will actually do relatively well, on balance.
Those best positioned will probably have lived below their means during the good times. Saving a good part of their income for the inevitable rainy day.
They will have avoided taking on high levels of debt; probably very little. Certainly, they won't have racked up debt on things that decline in value over time, and that don't produce an income. Read: cars, boats and jet skis.
The assets they own will be resilient, such as shares in companies whose goods and services are needed in good times and bad. And these companies themselves will have avoided high levels of debt.
Of course, even shares in those companies will see their market prices slashed during any crash. Even the underlying earnings of the business may decline somewhat and dividends may be pared back a little — but they will survive. And they will continue to provide an income in the tough times.
Importantly, sensible investors, will recognise that the intrinsic quality of their shares relies on the underlying qualities of the business. And that fluctuating prices is evidence not of business quality but of investor sentiment, alone. As such, they'll avoid selling their shares just because others are panicking.
Given they have some savings, they may even take the opportunity to buy some wonderful companies at bargain basement prices — and reinvest their dividends accordingly. They won't pick the bottom exactly; they probably won't even get close, but that will matter little over time.
Life will go on. And when the economy finally manages to claw its way back, these investors will see their (paper-only) losses recouped, and then some.
In the early parts of the recovery, there will be much speculation that it is a false dawn. By the time everyone agrees that the worst is over, the best part of the gains will already have been made. At every stage, there will be new reasons to think things are about to head southward again. Almost certainly, most doomsayers will be proven wrong.
Foolish Takeaway
Of course, we may not even be on the edge of a crash. After all, economists have predicted 9 out of the last 2 recessions, so the joke goes.
So what is the best course of action for investors if there isn't a crash? The wonderful thing is, it's the same: live below your means, avoid excessive debt, and invest in quality businesses. Just keep investing.
This is why we here at The Motley Fool don't get caught up in sharemarket scaremongering. We invest in a manner that prepares us for all possibilities.
Of course, with perfect foresight you could sell out just before any crash, and buy back in just before any recovery — but you're dreaming if you think you (or anyone) can do that.
It's up to you to be sensible with your finances, but if you need help in finding safe, reliable, income producing investments, Motley Fool Dividend Investor is here to help.
And don't think that you forego attractive returns by adopting a low risk approach — to date, our recommendations are well and truly beating the market average. That's something we expect to continue for many years, and throughout all the ups and downs of the economy.
