Every investor loves the bullish phase of the market, but starts to panic, as soon as the market crashes or prices of some stocks witness a sharp correction. And, out of fear of negative returns, many investors hastily stop their investments.
Managing the bearish market is one of the biggest challenges for such investors, as apart from falling stock prices, they also have to deal with all sorts of negative sentiments. However, for many seasoned investors, particularly this market phase entices them as it allows them to pick stocks at very attractive valuations, ignoring all the noise.
Let us recapitulate, how investing works and how you should deal with market corrections.
The price movement of stocks is not unidirectional, and tend to react as per different market situations and market cycles. That’s why in the stock market, there is a general saying, what goes up must come down, and the faster it goes up, the quicker it will come down.
Therefore, investing is termed as a game of patience and understanding, and the one who plays with the price level is always on the losing side. As, Warren Buffet, the famous billionaire investor rightly said:
The stock market is a device for transferring money from the impatient to the patient.
In this article, you will go through numerous examples, how investors created wealth, just by staying invested, irrespective of the market conditions and even when in 2008, the financial crisis hit the market hard.
Now, everyone knows the benefits of SIP, how super efficient they are for creating wealth over the long term with less money. As SIPs continue in all market conditions, whether it’s bullish or bearish, it helps in attaining rupee cost averaging. This means you end up buying more security when prices of securities are low, and less when they are high.
Also, stopping SIPs midway breaks away the compounding process, thus derailing your whole investment journey. If you don’t know, how compounding helps in wealth creation, read this article:
Now, we will check the returns of the index and a few large-cap and mid-cap mutual funds in the different market scenario.
The market return of both Nifty and Sensex in the last five years, from May 2014 to May 2019, despite having some major shocks (demonetisation, the introduction of GST, slowing growth), comes out to be a whopping 77 per cent growth.
And, if we select the time period, between May 2004 and May 2009, in which the global market experienced severe recession and deep financial crisis, both Nifty and Sensex managed with returns of over 200 per cent.
Now, factoring in both events in a large-cap mutual fund, HDFC Top 100 Growth (previously known as HDFC Top 200 Fund), the return of a monthly SIP between January 2008 and January 2019, comes out to be 13.51% per annum and in absolute terms, it is 131%.
And, for a mid-cap fund, HDFC Mid-Cap Opportunity, the SIP returns for the same time period comes out to be 17.67% per annum and in absolute terms, it is 201%.
Indeed, there are risks from market volatility, which can lower the overall returns of the investment, but following a smart strategy and diversifying can help a lot to minimize that risk. And, market corrections or fall in stock prices are a boon for long term investors, as it allows the investor to accumulate more units at a cheaper cost
So, brush aside all your fears of short term market volatility or investments in a bear market and continue with your investments ignoring the noise.