Of market crashes and recovery

With Brexit taking centre stage in world markets, we ran a check on how Indian markets reacted to various crises in the last two decades and how the recovery was. The good news is that there is a lot of money to be made after a crisis. This isn’t new news by any means. But if you understood the nature of the recovery, you will know that there is wealth to be built only when there are crises. So don’t hesitate to invest. More importantly don’t hesitate to hold what you have invested.

Let’s dig into the data now.

The table below shows how Indian markets reacted to various crises and how the market appreciated post that. It is important to remember that steeper falls take more time to recover and the precise reason to have a long term view.

As you can see, in the aftermath of each of the crises, the journey to the next peak has seen the money doubling in many instances. These returns have come within the next three years. The exception here is after 2001, where, owing to brief corrections in 2004 and 2006, the next actual peak was in 2008. This long bull run yielded 514% (money multiplying over 6 times).

The time you spend in the market also makes a difference. For example, anyone who had invested right after the Russian crisis would have more than trebled their money in the succeeding ten years. Yes, you would have invested at a low, but remember that this return is despite the market having contracted by 60% in 2008 after the US housing mortgage bubble burst.

Similarly, an investment in the market post the dotcom bubble would have seen your money grow over 5 times in the next ten years despite the 2008 crash. Please refer our previous articles – Invest long, invest right – Part I and Part II, where we discuss why you need to stay in the market for long to ensure you do not lose money.

It has now been almost 8 years since a major crash, the last one being in 2008. The markets have returned over 200% since.

After every crisis, you can see that the markets have been bouncing back. Hence it is only a question of patience. Yes, some crisis has a deep impact on our economy as well. But then, in such depressed state lies in buying opportunities.

In the past decade, it would be fair to say that Indian markets have by and large been swayed a lot as a result of volatility in FII flows. Of course, economic slowdown and recoveries are par for the course. Still, that India is more inward-looking and therefore better placed to weather global maelstroms is evident from about 80% of its GDP comes from within (the rest is from exports).

Hence, if you are somebody sitting on the sidelines when markets fall, do note that there is no better opportunity than during falls. But it is hard to time such falls. Hence, the best you can do is to invest through SIPs or invest lump sums in a phased manner during such falls. At the very least, the last thing you should do is to sell what you have already invested. It would be tantamount to selling at lows having bought at highs.