A lot of people are highlighting how equity markets have done poorly compared to even Fixed Deposits giving 6-8% annual returns. And while they are right when it comes to the data, it is also not the best way to look at things when you have come to equity markets for the long term.
It is true that Indian equity markets have done poorly for the last couple of years. The mood is no doubt terrible, more so for new investors who are going through this pain for the first time.
Look at the table which shows how the last 1/2/3 years’ Nifty50 returns are -9.7%, -6.8% and 4.7%, respectively. And boring Fixed deposits, on the other hand, have quietly done much better. Put the two side by side today, and the FD looks like the smarter choice. But this is just a present day snapshot. And it is taken at the most uncomfortable point.
Measured from a market peak, and especially mid-drawdown, an FD will often look better than equities. Sometimes for longer than feels reasonable (like today when 1/2/3 year returns of equity vs FD strangely show FD winning vs equities). Investors who made this comparison during past falls reached the same conclusion. The FD was ‘winning’ back then also. But run it after the recovery that followed, and the conclusion flipped. Which one is right depends on the return you actually realise over a full horizon, not on how the market has behaved in the last two years.
You can’t benefit from long-term investing if you can’t accept that long term is made up of ‘good’ short terms as well as ‘bad’ short terms. History and maths support this, even if it may not seem obvious right now. But keeping the faith during the dark moments of equity markets is what benefits you the most when the tide turns. It is not easy I know. But it is simple and what works. History shows recoveries have followed past drawdowns. It does not tell you when this one ends.
The costly mistake is treating a mid-drawdown scoreboard as a reason to act. Stopping the SIP, or exiting because the FD currently looks ahead, converts a paper loss into a permanent one. In most such episodes, that is what separated investors who eventually came out ahead from those who locked in the worst of the fall.
This is not an argument that the ongoing brutal phase of the markets is over or that equities would bounce next week or next month or next quarter. They may. They may not. The useful question here is – Are you judging a long-term allocation on a comparison that looks decisive only because you stopped the clock at the painful moment? If yes, the FD is not winning. You are just looking too early.
Now to be fair, adding money when markets are falling feels deeply uncomfortable, and almost irrational, if not scary. You will always wonder what if markets fall a little more? And if they fall another 5-10% after you have invested, that pain aggravates enormously. Remember, markets don’t do what you want them to do on your demand. But from whatever experience I have in markets, it pays to stay calm and remain objective. It helps to believe that Remember God in Good Times & Equities in Bad Times, and that Cash + Courage + Crisis makes real Wealth. Easier said than done, but that is how it is.
Equity investing should be done for the long term only. And in the long term, there will always be short phases when the markets will be volatile and give negative returns. This is completely normal, and you should accept it.
So if your goals are long-term and still several years away, then ideally you should be investing more as markets fall. Or you can stagger your surplus over a few months for better peace of mind. You can even rebalance your existing portfolio if you don’t have fresh surplus to invest. Instead of fearing a falling market, view it as an opportunity to invest at lower levels so that your future profits increase. A consolidating or falling market is not a disappointment. Rather, it is a market that is quietly doing the most important work for investors: rebalancing the risk-reward equation back in favour of them. So it is precisely the setup that resilient long-term investors should welcome!
Also wrote this on X (link)