Do Nothing When Stock Markets Crash

Over the past couple of days, I’ve had several friends and colleagues who displayed signs of panic. They were looking at the markets and frantically  sharing snapshots of their investments, which unsurprisingly, were all in the red. They were all holding highly rated, good performing funds. But they were nevertheless in the red.

By by its very inherent nature, Equity is a volatile asset class. At times, even after a full year of investing, your portfolio could show zero or negative returns. There have even been times in Indian stock market history where investments took 6 years to recover from their losses.

So seasoned equity investors, only concern themselves with the long term. They completely ignore this day-to-day market noise. While it drives most new investors mad, it doesn’t affect the peace of a long term investor much.

Equities aren’t supposed to be an asset class which go up, week after week. As an investor, if you aren’t able to understand and make peace with this, it may be best to avoid them an as asset class all together, and invest in safer, less volatile investments like FDs and Debt mutual funds. These low risk investments will almost always appear green anytime you look at them. But since they’re low risk investments, your returns would also be low(around 8-10% at best).

As an example, here’s an updated chart I created yesterday based on actual data between 1998 and 2018. This denotes the number by which your investment would’ve multiplied by, over this 20 year period.

Comparison of returns FD versus Mutual funds - Grownups Are Just Kids With Money - The Moneyplanting Program

Even the worst performing mutual fund gave 28X returns, compared to FD which gave 4X returns. But, remember that we had several minor and at least one major market crash during this period. In 2008, people’s equity investments were literally cut down in half as the markets crashed by almost 50%.

And despite of all that volatility, equities still managed to give the type of returns which you see in the chart above, with even an average performing mutual fund, providing a 50X return. Several mutual funds, including the ones listed in the chart, were in the RED for years together at a stretch, during the recovery from 2008 crash.

The most important trait you need to be build as a long term investor, is patience.