Your Tolerance for Market Falls Is Probably Not What You Think

Risk Loss Tolerance markets

When markets fall or the economy goes into a recession, you will remain invested. Or better still, you will invest more (buy low philosophy) to ensure great future returns when markets recover.


That’s the plan?

Great! It is exactly how it should be. And staying invested (and investing more) in the market falls is how you can create a lot of wealth from stock markets.

But it’s easier said than done.

You ‘think’ that you will remain invested or invest more in market falls. But will you actually do it?

That is something that only time will tell.

But I feel that people’s tolerance for market falls is probably not what they think it is. I cannot prove it. But let me show you an example and maybe you will realize it too.

I am simulating a Rs 10,000 SIP in HDFC Equity Fund starting from January 2007.

I have picked this starting point for one reason. The returns just before Jan 2007, i.e. upto Dec 2006 were great and hence would have attracted many new investors into the market.

So these investors would have begun their investment journey having their own ‘easy money’ notions about investing due to (recent) past experience.

Now have a look at what happens to the value of the investments from January 2007 to March 2009:

Value SIP Market Fall


  • In the 1st year of SIP, the investor would be patting his back that it was the right decision to begin investing. By December 2007, the investment would be up by almost 30%.
  • But then came what we all remember – the great leveller – the crash of 2008-2009.
  • The investor would have continued his SIP of Rs 10,000.
  • By March 2009, his investments would have come down drastically. Value of total investment of Rs 2.7 lac would have been about Rs 1.7 lac. So from highs of around +34% to a gut-wrenching low of -35%.

And this is where I want to stop this simulation.

What happened after this is well known to all. Markets kept moving higher and higher… and higher.

But think about it.

How many people would have got the guts to remain invested after seeing a drop from +35% to -35%. I know many who lost money and exited.

The notion that equity will give high returns no matter what… is not correct. It’s a volatile asset class and will remain so forever. Investors need to realize that these things will happen whether they accept it or not. And when this happens, their tolerance for losses will be tested.

People have different tolerance(s) for big market falls:

  • When they think about market falls
  • And when market falls actually happen 🙂

How people feel about big falls depends almost entirely on what has been happening in the market recently.

Investors who are asked about their tolerance following high past returns are likely to overestimate it, swayed by exuberance. Investors who are asked following low past returns are likely to underestimate it, swayed by fear.

In rising markets, it’s very easy to claim that you will remain invested in big falls. But most people’s tolerance for portfolio falls is not what they think it is.

And just to clarify, it’s not about starting or stopping SIPs to time the market.

SIP is a small amount when compared with a multi-year old portfolio.

Assuming the investor in discussion is not a new one and already holds a Rs 20 lac portfolio at the start (with Rs 10,000 SIP running), here is what he will have to face in 2007-2009:

Mutual Fund Portfolio Fall

After having Rs 20 lac at the start with Rs 2.7 lac in fresh investments, it is not easy to see your portfolio go down to Rs 14.8 lac. And notice the fall from Rs 32 lac (in Jan-2008) to Rs 14.8 lac in March 2009.

This investor would be less worried about starting or stopping SIPs and more about containing the fall of his multi-lac portfolio that he had already built.

I don’t want to scare you.

For most common people, SIP in equity mutual funds is the best approach to benefit from stock markets.

My only aim with this post was to highlight that you need to accept losses ‘too’ when doing your SIPs. It cannot be one way up. Equity is not a bank FD.

So think about it.

Is your tolerance for market falls and losses really what you think it is? If not, teach yourself to overcome the fear when things really do get bad.

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  1. The people who are “inspired” by bull markets, have frail mindsets. They have positive expectations, and a 2008 like crash or 2000 to 2003 like sideways market, could cause an SIP investor to change is mind mid-way. When reality hits, right between the eyes, when the going gets tough…. getting the hell out makes great sense!

    Nice write up.

  2. People with large corpus should switch the corpus to debt fund above NIFTY PE 24 ,BUT CONTINUE WITH SIP. reduce risk and tension.risk reward ratio is high above PE 23_24…

    1. Yes. Sticking to asset allocation and rebalancing accordingly is a good approach to manage portfolio of decent size.

  3. During market meltdown, AUM value automatically shrinks (-30% down), SIPs would be discontinued and then redemptions pressure. With all 3 happening simultaneously, too difficult to get the realistic data of investor behavior. While some smart guys might say my SL got hit, the reality is what the article pointed out ‘bhago’ mindset.

  4. It is scary. As though, looking down from he top of Burj Khalifa. A fall from this height could be precipitous and scary. Hope the people who are invested, has the courage to stick on..

    I have couple of thoughts here. In 2-Jan-2007, the sensex has already scaled up twice (to 13500) what it was in Jan 2005 (from 6000). That, by itself, is alarming.. In this context and scenario if a person starts SIP at this point of odd time, I assume the total SIPs he contributed, constitute a fraction of the net worth he planned to invest. In second example, if person already has 20 lakhs in this portfolio, This 20 Lakh is result of what already scaled up to that amount, (may be his investment was 10 Lakhs, if he started in 2005). Further, If one follow PE based approach by Dec 2007, it is already reached 25+. There should be some re-balancing like Narayan Bhat says above..

    Your article is dead right.. A fall is very scary. However, experts and gurus have been calling it tops every year since 2010 with a variety of valid reasons. The bull markets proved all of them wrong and just refuse to stop. It has parted ways with the fundamentals, partying and scaling new heights. The fall is certainly going to happen one day sooner or later.

    1. Thanks for sharing your thoughts Shyam

      Yes. Current markets do seem to have a mind of their own. But eventually, reversions do happen. Lets see how things pan out this time.

  5. Investors who have seen a 2008-09 fall actively followed by big bull market until now might have the stomach to take up another such fall in the future. But those who have not experienced it will definitely get scared and pull out at the wrong time (after the fall has taken place).
    For me, any fall due to economic reasons will certainly recover in reasonable time period but falls due to war is the most scary thing which is currently on. It might take decades to recover and will test even the most seasoned investor.

    1. Fair point Pradeep

      New entrants in markets do not have an hand-on experience of the market cycles. So to be fair to them, its true that many might not even understand the psychological aspect of market falls.

      And that’s a useful point you made about falls due to economic issues and wars.

  6. Rightly said Dev. The markets are a great leveler and it will always punish brutally and reward handsomely for those who make the right decision at the right time and for those who give it time. I agree to your write up and me to being an Adviser cum Value Investor, i can relate to it by putting myself in clients shoes. Great write up and keep this great work on!

  7. Dear Mr.Dev Ashish

    This post is a very well researched piece.

    Yes, you are right. Not many have the guts to stay invested during great market crashes.

    But those who do get amply rewarded.

    I did that during the post Lehman Brother crash. Not without a lot of nervousness and anxiety of course.

    But as the market rebounded to 15000, from the 8000 lows, I lost my nerve. I though that the recovery was temporary and sold off my entire portfolio. I made 250 – 300%, but it was a big blunder.

    In the end, I appreciate your good efforts and thank you for the same.

    With warm regards,


    1. Thanks Anand

      And I agree its difficult at multiple levels:

      1) To remain invested and buy more when things are falling
      2) Have the mindset to look at the huge notional losses and sit down on it
      3) When things start getting better, not exiting too early

      Hopefully, I wish that we all are able to take care of our investments at all three levels. Fingers crossed for the next time. 😉

  8. Hi Dev,

    My strategy is to look at asset allocation at all time and check it with respect to market valuation in terms of PE ratio.

    As per current valuation of 26PE my indian stock market asset allocation is roughly 38% which I brought it down from 46%. Those profits are now in liquid funds will go to equity funds if the market corrects, if the market continue to go up I will further sell equity to liquid funds..

    In any case funds required for next 5years are in safe place like FD and liquid funds only…

    By this I m least worried about market..


    1. Hi Ajay

      Good to know that. Maintaining the asset allocation in line with a set plan is one of the simplest and most practical way of managing personal portfolio.

  9. Beautiful Article Dev
    Thats why it is said that Average Return is myth, ( to assume your Financial Goal is achieved by average return of @12% ) not sure what reaction market will take at the time when you goals are near by and you need to withdraw the funds. So always ignore the market noise and focus on Portfolio Returns rather then average returns .
    Thanks Dev, you Article always give insights and practical approach to handle money .

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