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

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Larger picture

Posted by Muthu on September 10, 2015

Morgan Housel in this article mentions about the frequency of market (US S&P 500 index) falls since 1928.

Market Falls                                    Historical Frequency

10%                                                 Every 11 months

15%                                                 Every 24 months

20%                                                 Every 4 years

30%                                                 Every decade

40%                                                 Every few decades

50%                                                 2-3 times per century

This would give you a broad idea how frequently market falls and by how much. Just to explain a bit, in a decade, you would see one 30% correction, two 20% corrections, five 15% corrections and eleven 10% corrections. If you consider, anything equal to or more than 10% correction as significant; you would see around 19 such corrections in a period of 10 years.

All the excellent long term returns of Sensex and equity funds are after going through such corrections. For SIP investors like you, corrections provides you periodical opportunity to buy at lower cost there by keeping the average cost low in the long run.

The first and foremost thing to understand is how corrections are absolutely normal and how they actually help you to earn better long term returns. Equally important is getting the larger picture correct.

The larger picture is that over next 2 decades, Indian economy would grow multi-fold. Our per capita income would also multiply by many times. As the economy grows, many companies would do well and their earnings would grow. Stock prices are slave to the earnings; hence markets would continue to go up. In the long run, markets only go up, provided the earnings continue to grow, which would be the case for India over next 20 years.

Once you understand how we would grow many-fold over next 20 years with tens of corrections in between; you would cease to worry about corrections and bear markets. The ride would be bumpy but rewarding. The kind of wealth you can make by being disciplined, ignoring volatility and staying the course is huge. We would hand hold you during the entire journey so that the roller coaster ride is exciting and not scary.

Get the larger picture right, ignore every day movements and firmly stay the course.

3 Responses to “Larger picture”

  1. rajankute said

    Very useful information.

  2. Ash said

    The main issue at hand is not addressed – this scale of QE and coordinated influencing of markets by central bankers has never taken place. So can we use history as a guide to the unwind of this QE ? It will take a brave man to say YES

  3. Sid said

    A lot of businesses that would grow are unlisted like Amul, patanjali, Hyundai …etc. List is long across all sectors.
    The concern is what if the unlisted Indian business/ foreign unlisted companies keep growing aggressively when the economy is growing and keeps taking away the mkt share from the listed ones…???

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