What happens if you invest during a stock market crash?

Investing during a Bear Market

Baron Rothschild an 18th-century British nobleman and member of the Rothschild banking family quoted -“Buy when there’s blood in the streets, even if the blood is your own.Rothschild made a huge fortune buying in the panic that followed the Battle of Waterloo against Napoleon. The great value investors of all time like Benjamin Graham, Warren Buffet and many more have made most of there fortune during the Bear Market. A Bear Market is a period during which the markets fall 20% or more from the recent high.

Why do people panic during a market crash?

For people who are new to investing, they are scared that the market may go further down and hence, might not be the right time to invest. The people who have investments try to exit and enter at a better price. However, the problem is that even the most experienced investors fail to time the market correctly and repeatedly. People planning to invest in the stocks at the bottom-most price would probably fail most of the times. The best approach is to buy when stocks are available at cheap valuations and not to find the bottom.

Is it worth to invest during a market crash?

Ironically during a market crash, investors don’t make rational decisions. They tend to be emotional hence they end up selling in panic. An intelligent investor invests more when the valuations are attractive. When investing at attractive valuations over 5-10 years, the returns generated will be usally high. We wanted to illustrate how the markets have performed post such deep corrections and have analysed data from 2000’s when the market has corrected by more than 20%. The below graphs show the growth of an initial investment of ₹ 1,00,000 when the markets corrected by 20% over 5years, 7years and 10years.

Value of Rs. 1,00,000/- investment after 5,7 & 10 year once markets have corrected 20%

Investment of ₹ 1,00,000 has grown to ₹ 5,13,882 in a period of 7 years, a return of 5.13x (CAGR-26.34%) from the initial investment. The minimum return is ₹ 1,60,210 for a 7 year period for an initial in 2008.

CAGR of investment after 5, 7 & 10 year periods following a 20% correction

The median returns for Sensex for 5, 7 & 10 years periods are 13.638%, 17.128% & 13.609% respectively. The maximum CAGR for 10 year period is 19.06% and minimum CAGR for 10 year period is 7.66%.

The twin forces of fear and greed can mislead you and unsettle your investments. One should not panic and sell in fear, nor should one get tempted by the above numbers and start investing aggressively.

Importance of a financial plan and asset allocation strategy

Prudent measures help you during turbulent times. The twin friends of an investor are a financial plan and an investment policy statement. A financial plan is the foundation of the building called ‘financial life’; the stronger the foundation, the higher the building. And an investment policy statement illustrates the right asset allocation matrix that is suitable to achieve the goals illustrated in your financial plan after considering your risk profile and individual circumstances. If you already have one, stick to your plan and the strategies illustrated in the investment policy statement. If you don’t, it’s time to connect with a financial planner who can help you build one.

Get a FREE 30 mins consultation call with a SEBI Registered Investment Adviser to understand how a financial plan can help you achieve your financial goals and aspirations.