Investment during troubled times: -20%, -30%, -40%, -50%
We always discuss how the markets are doing and most of the time answer is “markets are volatile”. Why are markets volatile? Why can’t they just reflect the way the economy is doing? Why it’s difficult to predict exactly how the markets would behave?
Well, these are tough questions to answer and there are many moving parts that determine this. Markets and economies are rarely in sync because markets move on expectation, and the economy moves on reality. Markets are like a pendulum, which moves back and forth from optimism to pessimism based on expectation. That’s why we don’t try to time the market but average out our investments through systematic investment plans.
Let’s now focus on pessimism or troubled times. Let’s define pessimism as when the market corrects by more than 20% from the peak and market here means Nifty 50 Index. The following are the instances in history when it happened. The highlighted corrections range from -20% to -50%.
Every investor has a different reaction to these corrections.
• An investor who panics and redeems investments
• An investor who stays on course with the investment and
• An investor who aggressively invests during these times
The outcome for each one of them is dramatically different. The following table gives the outcome of an investor who had an SIP of 5,000 from Jan 2000. Case 1 is where investors didn’t react to the corrections. Case 2 where investors invested 2 additional SIP installments, that’s 10,000 during these corrections, and case 3 is where investors redeemed 2 SIP installments during these corrections.
An investor who stayed on course ends with a final value of 47.08 Lakh. Investors who aggressively invested during these times end with 52.86 Lakhs and investors who redeemed during panic times ended with 41.31 lakhs. Surprisingly XIRR return in all three cases is close to 11.55%, but the end values are drastically different.
We hope this helps investors to embrace market volatility and use it to their advantage to achieve their financial goals and become financially independent.
Article by:
Shrivallabh Patil — Vallabh is an Engineer, a Management Graduate and a CFA which gives him a unique advantage of evaluating things from various perspectives. He has been associated with Sapient for over 6 years and currently holds the position of Vice President. He loves to travel and is passionate about investment research and analysis.
