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D.Muthukrishnan (Muthu), Certified Financial Planner- Personal Financial Advisor

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Corrections are normal

Posted by Muthu on August 26, 2015

I’ve mentioned many times how corrections are absolutely normal in stock markets.

Given the scenario right now, I thought we may revisit this topic.

Be prepared for a drop of:

10% – very frequently

20% – periodically

30% – once in a while

50% – few times in your investing life

There have been instances of radical fall in a very short time as well. On October 19, 1987 (popularly known as ‘Black Monday’), the Dow fell by 22.61%. Nearly one fourth of market capitalisation got wiped out in a single day. This is the highest every one day stock market fall (in percentage terms) in U.S so far. Though many reasons are given including program trading, nobody saw it coming and no one knows why it happened.

The whole U.S. market got paralysed and dooms day prophets mushroomed. Everyone predicted a great catastrophe. The funny part is market recovered and closed marginally higher in December than what it opened in January. So 1987 was actually a positive year for Dow. In the long term graph, this one day fall of 22.61% looks like a minor blip.

Warren Buffett has mentioned that during last 50 years of Berkshire Hathaway, there has been a fall in share price by 50%; 4 times during the above 5 decades.

As I mentioned yesterday, temporary declines are not permanent losses unless we sell due to panic.

But for volatility, everyone would be an equity investor. Who wouldn’t want a smooth 18% annual return?

To earn the 18% kind of annualised return Sensex has provided in last 4 decades or 22.74% kind of annualised return CRISIL AMFI Equity fund index provided during last 2 decades; one has to willingly embrace volatility. If we want long term returns of equity, we’ve to accept the side effect of volatility.

We always need to remember that equity is best asset class in the long run, which provides real return significantly above inflation, increase our purchasing power and build our wealth.

SIP is a superb tool which makes us buy during down times, which otherwise we may hesitate to do.

As I mentioned in a tweet:

“Why SIP is powerful?

Removes emotion out of investing

No timing the market

Buy at lows which we otherwise won’t do

Time diversification”

So all you’ve to do is to continue your SIPs without worrying about what happens to markets in near term.

Don’t keep looking at your portfolio. This is a good habit to follow always; more so in down times.

Some of you wanted to invest your emergency fund in equity now. Please don’t do that. As the name suggest, it is for any unexpected emergency. Keep it as it is. Only long term money, what you don’t need for at least next 10 years, should be invested in equity.

It is sufficient if you stick to your SIPs and stay the course.

One Response to “Corrections are normal”

  1. mr. snehal vankudre said

    superb article sir as always. You are always there to lead the path of hope. Stay invested is the mantra. thanks sir

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