Difficult times don’t last. They may get over within a few months or it may take a year or more. History has proven that equity markets recover completely over time after any collapse, normally with a sharp rise. Experience has also shown that stock markets react rather badly to such ‘shocks’ with very sharp falls sometimes in a very short period like the Covid 19 crash, mainly because the market factors in negative news expected for months ahead. At the same time, markets also recover fast too, sometimes faster than the broad economy or other factors such as GDP, etc.
They come in lumps – sometimes within a 1 or 2 year period, but mostly over a 5 – 7 year period. And this is the law of the nature of equity market returns which we must accept as equity investors. If your financial goals and plan are in place, and you have surplus funds to invest for 3 to 5 years, one must use such sharp corrections as opportunities to add to your equity investments in a staggered manner.
One of the analytical ways of judging the markets is with Price Earnings Ratios. In a market crash scenario, stock prices correct to low Price/ Book Values which means sound good companies will be highly undervalued. And historically it has been proven that the best returns have been achieved by adding to your equities during a ‘shocking’ time.
Prudent Action taken by us during market highs and market lows and in between these periods determines our ability to make money in equities. This is the meaning of Dynamic Balance.
"Widespread fear is your friend as an investor because it serves up bargain purchases. When stock can be bought below a business's value it is probably the best use of cash."
– Warren Buffet
We have noticed that when shocks and corrections happen, recovery too has happened to higher levels as seen in below.
As you can see in the table above, equity is only a part of our investment in a holistic financial plan. But sadly, during a shock, we don’t look at the plan and investments holistically. The entire focus is on the negative return on equity leading to stress and panic. Think about it, shares and mutual funds come with a daily value and NAV (net asset value) and we see the daily ups and downs transparently. Do we give as much thought to price corrections or crashes in real estate? No, because we don’t see a ‘daily NAV’ for real estate. And if we did, we would perhaps panic even more.
In conclusion, it is important for us to see our investments and finances holistically, especially during such times. We can help you structure your conversations with our certified financial planners to build these holistic financial plans for you Know More. This will help you understand and mitigate the risks of the market’s ups and downs to a manageable level.