Market volatility can leave the faint-hearted in a state of panic. When the correction happens to be steep, the drawdown can leave them distraught. As a matter of fact, they don’t need to!
The markets may turn playful as the wheels of time roll on, but the broader market indices tend to defy the gravity in the longer run, reveals the Sensex data of past 32 years.
Upon closely examining the data for the past three decades, one can infer that the declines which were as steep as 21 percent did not lead to permanent falls for that year. And eventually, the broader market index recovers by the close of the year.
Sample this: In 2009, Sensex saw a drawdown of 21 percent but it eventually rose 76 percent by the end of the calendar year (see data below). Likewise, broader market index fell 13 percent during 2012 but it rose 27 percent by the end of the year.
More recently in 2019, the drawdown was 10 percent but Sensex rose 14 percent by the time the year drew to a close. During the pandemic year of 2020, the markets naturally panicked and faced a steep fall of 38 percent before they bounced back and settled 16 percent higher at the end of the year.
“In emerging country equity markets like India 10 percent to 20 percent drawdown or volatility is given which can happen due to various reasons. That’s why investors should be vary about their asset allocation and not try to time the market,” says Jayesh Faria, Director, Regional Head, West, Motilal Oswal Private Wealth. So, what money lessons we can learn from this.
Wealth advisors point out that investors should stick to the following rules regardless of what Mr Market says.
Do not panic when markets fall: When markets fall during a year, it could be a knee jerk reaction of a market event, or an outcome of profit-booking, or something else. The fall – more often than not – would be temporary. So, stay calm and stay invested.
Don’t try to time the markets: The market volatility primarily affects those who try to time the markets. So, it is not only not advisable but a disastrous thing to do. This is why, the age-old wisdom says that investors should invest in small tranches to minimise the impact of volatility.
This practice of investing offers the advantage of rupee cost averaging, a phenomenon inspired from Benjamin Graham’s dollar cost averaging.
Equity is meant for the long-term investors: Since markets may move in one direction (downward) or other (upward), so one should invest in the equity only when you have patience to stay invested for a minimum of 3-5 years. Investing in equity is not advisable for those who have short-term goals to meet.
Short term movements are no indicator of macro-economic situation: It is often said that markets and economy go hand in hand in the long term but in the short term, it may not necessarily be true. So, when the markets slide steeply, it is not an indicator of the macro-economic fundamentals.
Believe in the intrinsic value and not on fluctuation: As Benjamin Graham mentioned in his bestseller ‘The Intelligent Investor’ that market fluctuations can be understood by an imaginary person ‘Mr Market’ valuing the price of your securities on a daily basis, but what he says on a daily basis has no bearing on the actual value of the assets you hold.
So, as an investor you should be more concerned about the intrinsic value of your assets.
