Manu Nedunkandathil, CFP
Market crash, is it any different this time?
Updated: Aug 20, 2021
The right answer to the question "How is the market?" depends on whether you are a seller or a buyer. A rising market is good for the seller and a falling market is good for the buyer.
The current year has been highly volatile. The market touched an all-time high at the start of the year with SENSEX clocking 42,273.87 on 20th January 2020. However, a month and a half later, the market had its worst-ever crash in a short span of time with SENSEX tanking by almost 38% in a couple of weeks. This must-have shaken even the staunchest believer in the equity markets. Many even claimed that this time it is different. Doomsday is here!
Let's take up a pause here and go back in history. Did markets correct for the first time? If it was not the first time, then what happened after the corrections?
A look at the historical data of SENSEX will show that the markets have corrected around 3 times before the current crash due to the COVID-19 pandemic. And each time people felt that this time it is different. If it was the Harshad Mehta scam in 1992, then it was the Ketan Parekh scam in 2001 and in 2008 it was Global Financial Meltdown.
During each correction, the market fell by 43%,41% and 60% from the respective recent peaks. But each time within two years the market recovered by 70%, 62% and 132% respectively each.
Each correction had a different reason, but within two years of the crash, in each case the market behaved exactly the same, rising from the ashes to reach new peaks.
People who believed that this time it is different and exited from the market booked losses. But, people who remained invested or added fresh funds in the markets were handsomely rewarded.
Despite the current correction, a sum of INR 1 lac invested in April 1990 would have grown to INR 43 lacs most of which is tax-free. Which in terms of returns is 13.28% CAGR(Compounded Annual Growth Rate). During the same period, SIP return has been 11% CAGR again most of which is tax-free. Indeed a good way to preserve and grow wealth isn't it.
(Note: - Dividend income has not been accounted for here to calculated the returns. Dividend income from investments will add approximately another 1% to the overall returns.)
As I write this, the SENSEX has already recovered 34% from its recent lows reached on 23rd March 2020. SENSEX had reached a low of 25,638.9 on 23rd March 2020 and is currently trading at 34,287.24 (Friday, the 05th June 2020 closing).
While the market does its job consistently without rest, it only expects one thing from us....discipline and patience.
There are things that we can control and there are things that we cannot control. So, let's focus on things that we can control (our emotions) and let the market do the magic for us. Keep investing with discipline and markets will surely reward us. Try to outsmart the market and the market will surely punish us.
Whatever we do, the power to choose lies with us.
So.... choose wisely.
"We don't have to be smarter than the rest. We have to be more disciplined than the rest."