Accept Market Falls, If you want to create Wealth

In the last 23+ years (i.e. in 283 months between Jan-1998 and Jul-2021), the Sensex has ended with negative monthly returns on 118 occasions.

This means that 118 of the 283 months have seen negative returns.

That is 41.7% of the months, the Sensex ended up lower than what it was in the previous month. And that’s not a small percentage.

Markets don’t move in one direction. They rise and they fall. Every year has months that give positive returns and others that give negative returns.

In fact, if something was to give negative returns 41.7% of the time, it will be difficult for people to agree to invest in stock markets. 🙂 Not many people have that kind of risk appetite.

But for all these months where markets fell, it must be acknowledged that markets give positive months too. Have a look:

If you look at the annual returns of Sensex, it’s clear that it’s not a straight line upward journey. As expected, some years are good and some aren’t. At times the moves are reasonable and on rare occasions, sharp.

But the most important thing to understand here is that the overall trend is upwards. Sensex has moved up from 3055 at the end of 1998 to 55,000 at the time of writing this post (in August 2021)

So inspite of all the ups and downs it continues to move up.

And if you calculate the market’s long-term average* returns, you will see that despite its volatility, the returns have been better than what safe debt instruments offer.

* Be careful with average. Here’s why.

Please don’t assume that I am writing off debt instruments like PPF, debt funds, etc. All these have a place in a portfolio in line with the investor’s asset allocation and goal needs. But if you wish to have a better-than-risk-free rate of return, then you will have to embrace volatile assets like equity.

Once you do so, you will experience the ups and downs.

And if you want to benefit from the UPs, then you will have to face the DOWNs too.

That is a fair deal I guess and that is how returns are made in the markets.

Fall in markets is very normal. They happen regularly. You cannot avoid them. But if you have recently started investing, then chances are you may suffer from recency bias and feel that good returns from stocks are your right. 😉 But that’s not the case. And sooner you realize it better it is for you.

Markets aren’t obliged to deliver returns when asked for. They deliver returns when they want to. It is up to you to remain invested (even in bad times) to benefit from the good times later on.

Infact, if your financial goals are several years away, we should pray for market falls so that we can buy assets at lower prices. Isn’t it?

I further extend the data in the table above to highlight how the CAGR changes with each passing year.

As you will notice, the % tends to stabilize after few years and that is what we should aim for. Volatility will be there in the short term. But in the long term, things will average out and help you create wealth if you are willing to accept the short-term pains.

Think about it.