There are has been much said about market timing. Frankly speaking, it works, but generally in hindsight or if you can predict the future with uncanny accuracy. Unfortunately, no one has a time machine or the ability to predict complex events.
As such, financial markets don’t lend themselves to much pin-point prediction accuracy. This means while you can definitely win big if you could time your exit and entry in equity markets, especially during a crash, but it is simply not possible to get it right in any way which can be said to be more than the result of pure randomness. Thus, the question arises if it makes sense to stay invested during a market crash considering you can’t really see one coming.
What does real-world experience tell us?
We studied a real-world investor, much like you or I, who started investing in the year 2000. Assuming the individual was in his or her mid-20s when they started if they continued investing till date they would have seen the crashes of both 2002 and 2008.
This is the story of a courageous yet practical investor who believed in the long term growth story of India and the fact that equity is a long term investment.
The investor invested 10,000 each month in the index (Nifty 50) from January 2000 till September 2020. This is to replicate what investing in a good mutual fund portfolio would have been like.
This is what the investor’s investment performance would have looked like:
The net investment by the investor over these 2 decades amounted to Rs 24.80 Lakhs. What did this investment grow to, despite two market crashes? A neat Rs 92.92 Lakhs. Just Rs 7 lakhs shy of a crore.
The cumulative growth of this investor looks like this:
As you can see, the growth rate has fluctuated by quite a bit over the investment horizon. In the end, the investor’s return stood at 660%. But in the course of this investment horizon, this particular investor would have seen a high of 19.7% annual growth and a low of -27.3% annual growth!
As you can see, the investor would have seen, in multiple years, their corpus go back to what they invested and often below what they invested. Here is a look at the trials and tribulations our brave but smart investor faced.
Experience during the initial years till 2008 crisis
The investor would have been hit hard in their first year of investing itself and experienced a fall in their investments of almost 40%! Between 2000 and 2007, he or she would have experienced a drawdown (a fall in corpus value) in 5 of the 7 years! The investor wouldn’t have seen a positive growth rate until October 2003.
Three years of negative growth rate is enough to frustrate most investors and we wouldn’t blame them if they wrote off equity completely and settled for a trusty old FD. Except, our intrepid investor kept on investing believing that equity is for the long term.
By the beginning of the 2008 Global financial crisis, this investor would have seen his or her growth rate on an annual basis go up from 0.8% to between 13%-16%. The investor would have been feeling vindicated by now. But there were dark clouds on the horizon by now. While they would have been looking forward to the latest SRK blockbuster Chak De! India, the investor would face their own Chak De! moment soon enough.
Experience during the 2008 crisis
Portfolio Value on 13 Jan 2008 - Rs 36.68L
Portfolio Value on 25 Jan 2009 - Rs 16.66L
These are the portfolio values the investor would have seen on their statement on these two dates. Seeing a 55% drop in portfolio value doesn’t sound fun at all. But if the investor would have panicked and honestly who can blame them, they wouldn’t have seen this:
Seems interesting to say the least, doesn’t it? That’s why any decent investor worth their salt believes in investing for the long term rather than making a quick buck trying to time the market or expecting abnormal growth in short periods.
The investor would have invested roughly Rs 12 lakhs over this period and starting from a loss of Rs 20 Lakhs would have seen their corpus reach nearly a crore. Staying invested rewarded the investor for their faith and wisdom. But it doesn’t end here.
2020 - the year no one saw coming
The year that we are experiencing now would have hit this stalwart as well. The investor who would be in their mid to late 40s now would have seen their long term portfolio go from Rs 99.3 Lakhs (in Feb 2020) to a gut-wrenching 62 Lakhs in just a month! And yet, the investor didn’t panic sell all their investments. They stuck around and kept investing.
By end of September 2020, the super investor is at Rs. 92 Lakhs and counting. Not panicking meant the investor didn’t lose the Rs 37 lakhs they would have otherwise. Just a few months of patience made all the difference.
The journey ahead
During the investment journey, the investor saw 12 years of drawdowns. The emotional experience would have been trying to say the least. Yet, looking back, the facts tell us the investor did the right thing by staying invested rather than panic selling during a market crash. It often took years for the investor to get back on the growth path but the growth more than made up for the bad years of zero to negative growth.
What you should take away from the above
1. Equity investing is a long term endeavour. It’s most definitely not a get rich quick scheme. It’s not a 1-3 year thing, rather think decades if you want to create a truly big corpus. What goals you assign to your equity investments need to keep this in mind.
2. You will see bad years. That’s guaranteed. What matters is if you stay the course during those years especially. It won’t be easy but fortune does favour the patient in the case of equity.
3. Panicking during a crash is a bad idea. Past data tells us that. Staying invested means that sooner or later you are likely to get back on the growth track. Being patient is monetarily rewarding.
4. Asset allocation where you have enough stashed away in fixed-income investments like good debt funds can help you stay calm during the bad years. An Emergency fund and good debt allocation are essential to staying the course. Otherwise, you are bound to panic.