A Blessing in Disguise?

Dear Reader,

The Indian stock markets hit their peak on 26th September 2024 and have been on a downward slide since. To put this into perspective, here’s how your investments have fared based on your entry point – for every ₹100 invested, today’s value is:

• 5 months ago: ₹85

• 1 year ago: ₹104

• 2 years ago: ₹145

• 3 years ago: ₹148

• 4 years ago: ₹177

• 5 years ago: ₹220

We know by now that the stock markets have the potential to deliver optimum returns over the long-term horizon. But most investors right now are looking at the news and only registering one thing – the markets falling!

So what do you do when you feel like this?

For now let’s do a quick exercise: imagine you are a long-term systematic investor in a diversified equity index fund—say, the Nifty 500. You have the option to decide when to start your SIPs.

Scenario 1:

• You start your SIP at the market peak for example, in February 2000

• Over the next 19 months, the market falls by 51%.

• Outcome: Your two-year SIP of ₹10,000 per month, totaling ₹2.4 lakhs invested, shrinks to just ₹2.05 lakhs. A negative return of -14.1%

Scenario 2:

• You start your SIP at the market bottom in September 2001.

• From this low point, the market only rises.

• Outcome: The same two-year SIP, totaling ₹2.4 lakhs now grows to ₹3.81 lakhs, boasting an impressive return of 51.4%.

What would you choose?

I know it’s tempting to choose Scenario 2, but hold on for a minute.

The values today (February 2025):

• Scenario 1: Total invested – ₹30.10 lakhs; Market value – ₹2.98 crore

• Scenario 2: Total invested – ₹28.20 lakhs; Market value – ₹2.37 crore

It might seem counterintuitive, but investing in a falling market can often lead to more attractive long-term results!

As William Bernstein aptly puts it in The Four Pillars of Investing:

“Young periodic savers should get down on their knees and pray for a severe bear market at the beginning of their investment journeys so as to acquire shares on the cheap…”

Dear reader, I can hear what you are thinking: “Despite the data and compelling arguments that a falling market is good for long-term investors, why do we feel uneasy?”

We’ll explore the answer to this in the upcoming editions.

Disclaimer: This content is for education alone and is addressed to a general audience from all walks of life. Personal finance is more ‘personal’ than it is ‘finance’. Kindly consult a professional before acting on any advice in this newsletter.