Why “Market Going Down” Is Every Investor’s Best Friend?
Amar is a CFA Charterholder and CFP, having over 20 years of experience in IT and Financial Services. He is very passionate about spreading financial literacy and has authored four best selling books on Personal Finance.
15 Oct, 2018
After the recent downturn in the Indian stock markets, you can be pardoned if you wished that the markets were a bit tamer. Wouldn’t it be nice to get, say, a steady 7% return every year rather than all these ups and downs?
Be careful what you wish for. There are at least three reasons why you should hope the markets continue scaring investors out of their wits.
1) The very fact that stock market downturns scare people is one reason why stocks deliver a higher return compared to bonds or fixed deposits. Economists call it the “risk premium;” which can be roughly translated as: you are compensated with a far higher return to stomach the ups and downs of the market. Over their history, stock markets in India have delivered around 16.1% compounded p.a. and SEVERAL TIMES higher than Fixed Deposit. As an example: SENSEX, 39 years back, in April 1979 was 124 and today, it is 36000. Over 39 years, SENSEX has delivered 16% p.a. in spite of all the good and bad national / global events that have happened.
2) If you’re accumulating for your long term goals by investing money every month or quarter, every downturn means that you can buy at a bargain price while many other investors are selling out at or near the bottom. Thus we want the markets to go down once we have started investing as we get to buy lower and lower. Over time, as the market recovers, this can give you an abnormal return. You might feel happy to see the market going up but actually this translates into a lower long term return. So pray that the market goes down once you start your investing program.
You are always a winner when you are a regular and disciplined investor. When markets are down, you get more units and when markets move up you see your wealth grow.
3) Market downturns give an advantage to those who are willing to practice disciplined investing and re-balancing among different asset classes. Basically, this means when stock markets go down, any new cash goes disproportionately into Equity Mutual Funds to bring them back up to their former share of the overall portfolio. This, too, allows you to buy extra units when the prices are low, and can also boost long-term returns.
There’s no question, the downward plunge on the stock market roller coaster is scary. It’s hard to maintain your discipline when the voice in the back of your brain is telling you to bail out on the bouncy trip before somebody gets hurt.
But unless this is the first time in history that the market goes down and stays down forever, we will ultimately look back on the decline and see a buying opportunity, rather than a great time to sell and jump to the side-lines. The patient, disciplined, long-term investor in you should see market volatility as one of your best friends and allies in your journey toward prosperity and long term wealth creation.