As the sharp fall in equity markets continues, it is unnerving to say the least. Since 6th March 2020, the Nifty 50 index has fallen by over 16% in 10 days. Sharp declines cause anxiety but in truth, historical data shows that recoveries from such lows happen every time. What you need to know is that the timing of the recovery and the speed can differ and can’t be predicted.
What data tells us
First, let’s understand what is happening, is it just a correction or a bear market. A bear market is officially defined as a period where the fall in prices as measured via a suitable benchmark index has been at least 20% from the recent peak. Nifty 50 saw its peak in mid-January 2020, at a value of around 12400; at its current value of around 9200, this is slightly more than 25% fall from peak.
Hence, it is established that this is a bear market. This is important because it means that the fall in prices can stretch out a lot more.
A quick look at previous bear markets will show you how much more. Here is an example; Nifty 50 fell 45% between April 1992 and August 1992, then bounced back 35% from the lows within two months and again proceeded to fall 37% till April 1993. It's only after that, there was a more structural rally when the value for Nifty 50 doubled over the next one year.
The table below will show you that bear markets can be of several different kinds and can last longer than you think. In case of long bear markets, returns in the next year or two are significant too. Nevertheless, while the bear market is on, the signs can be confusing. Many times, markets bounce back only to fall to the bottom all over again (see table).
There have been many bear markets over the last 3 decades, each is different in terms of extent of the fall and speed of recovery. Timing recovery is futile, remaining invested and adding regularly is what matters most.
It’s about how you react
Every bear market phase will have a different trigger. Don’t try to reason why it is happening, rather focus on what you can do at times like these. Once the market has corrected 20% from its recent peak, you know that it can be considered a bear market. Here are some guidelines that can help you tide over this period.
1. Don’t panic and withdraw from equity. Check your goal timelines and redeem as much funds as you need within a year or two.
2. Continue with your regular investments in equity as this is the only way to take advantage of lower prices, thus, benefitting you with better long-term returns. If you stop now and restart post markets rising you lose out as prices would have risen already.
3. Trying to time the bottom of the market is futile. As seen in the table, there can be more than one bottom and really you won’t know when it is until you cross it.
4. Use market corrections as a way to realign portfolios to good quality equity funds and stocks.
5. Remind yourself that market volatility or ups and downs happen but in the long run, in a growing economy, returns from equity markets are likely to beat inflation and create wealth.
6. Long run in equity means many years; longer the better but plan for at least 5 to 7 years of minimum investment in equity.
It is next to impossible to time when you should move in or out of equity markets. While market corrections usher in reasonable valuations for stocks, right now it’s really a crisis of confidence that’s playing out.
Hence, the market fall can last much longer than one might think and prices may fall a lot more than you are comfortable with. You will realise it’s not about panicking and moving out. It is much easier to stick to your goal timelines and invest in equity regularly with a long-term time horizon. Give your investments time to ripen and give yourself more patience with your investments.