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Staying safe and riding out market crashes – 320 years of data!!

We hope that each of you is reading this post from the safety of your home. While the government and WHO is telling us how to stay safe from a health viewpoint, we would like to focus on why you should remain calm from a financial viewpoint. Over the last month due to unprecedented market volatility, we have been in touch with many of you via blog posts (please see here and here), WhatsApp, phone, email etc. 

This post is about looking at past data of market falls and understanding the best way out for investors like us. We look at how markets have behaved post steep falls and the learnings for us. 

1000 + Instances of 50% market falls from 1692 to 2015

In 2018, NBER studied 300+ years of market data to understand how markets behaved after a crash. Special thanks to Ben Felix who referred to this study in a recent note. Looking at 101 stock markets across the world from 1692 to 2015, they tried to identify instances when the markets fell more than 50% over a 1 year period. Such events were called as negative bubbles. They found that there were 1032 such instances across the world.

How did markets respond AFTER negative bubbles?         

As always, we are interested in knowing what happened after the event and checking if there is a pattern. The advantage of taking such a big data set is that it overcomes sampling bias, survivorship bias, specific economic scenarios, country specific challenges etc.

The key finding, they had was that markets experiencing a large crash have a high probability of a rebound and the average return following such a crash is nearly 14% higher than returns with a positive return in the prior year.

Also, two more interesting points were that higher the crash, the higher the probability of a rebound. And if there was a global market decline there is a larger rebound in the period following the crash.

 The Indian context – How recoveries have happened

The question we will have is whether all these theories work in India. In the last 40 years, we have had three major crashes of 50% of more. In each case, the market had steep recoveries. Let us look at some data

  • Harshad Mehta scam in 1992- There was a 50% fall between 1992 and 1993 saw a 103% recovery by 1994
  • Dot com crash in 2000 – There was a 56% fall between 2000 and 2001 saw a 131% rise by 2004
  • Financial crisis in the US in 2008 – The markets had a 60% fall between 2008 and 2009 with a 156% rise by 2010

 Advantages of staying put – 44 times returns in 22 years

Last month, we looked at a fund which was launched in 1997. This was before the Asian Financial crisis. If an investor had invested in 1997 and held through till now, they would have seen three steep market falls (and several smaller ones). Even after that, the value of the initial investment would have grown 44 times over the past 22 years (CAGR of 17.95%). Sadly, fund house data shows that only a few hundred investors have remained patient (even those who stayed through mostly forgot that they had the fund units !!)

What should we do now?

We should now continue to stick to our long-term plans with asset allocation based on our goals.

We would have a separate emergency corpus in fixed income to meet our urgent spends and short-term goals.

Historical data and practical experience shows that steep market corrections are followed by market rallies. This is the best time to continue our SIPs and also allocate capital to equity.  Of course, this is money for the long-term goals and would not be needed in the short run. The money can be deployed in stages.

Please stay calm. Regular viewing of the market ups and downs is injurious to our mental peace without adding value. Stay calm, safe and healthy!

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