WHY MARKETS CRASH?

That is the one million dollar question. Occur some other good questions not only why, but when and how. We never can be sure about when really comes the crisis, but it is always with us, it is only the question of the time when occurs and which market will crumble. The crashes are part of this business, it is like breathing without any air out we wouldn’t be able to get in any fresh air and we are gonna die. The markets will have always crashes, without exception. Rather than wondering if we're going to have another crash, spend our time planning how we will react to a crash when it inevitably comes. Mentally prepare ourself, have some cash. Just wait and be sure the new crash will happen.

Statistically proven that by 8% goes up the markets year by year. Why 8%? I don’t have any idea, my only guess that it is not extremely high and low and significantly over the inflation. What happens if the grows is stronger than 8%? Shortly, meaning within few years the market needs to make correction to reduce the median back again to 8%. And if the return is less than 8%, the market will do faster growths than 8% and catch up the 8% level again. The market doesn’t respect the extremes. Therefore, we always have to trade the extremes because there is a significant tendency of the market heading to the normality.

The other key factor is by Morgan Housel „Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime.” Those who don’t understand this will eventually learn it the hard way”. That is a fascinating point. Most of the traders don’t understand that and try to always buy the tops. They just look back into the rear mirror and see the nice performance back in the last months. But, I am fully convinced the profitable trader also takes a look back at rear mirror but he is looking for not the tops but the dips and buy the crashes. It is a contrarian attitude and sometimes is so hard to follow that approach. We have to have patience and waiting for the good opportunities and buy the bargains, maybe it comes once a year, but will be a fruitful deal for sure.

When the crash comes don’t panic and hesitate for a second. Don’t look at the crash as a horrible and miserable momentum, look at the crash as a new and buying opportunity and buy more and more stocks. The volatility is a good friend of the great traders. Volatility scares enough people out of the market to generate superior returns for those who stay in," Jeremy Siegel said a few years ago.

The BFM Assets Team.