April 01, 2020

The Real Sting Of This Market Crash

As one might expect, the stock market crash this year has been compared with the fall in 2008-09.  If I leave aside the macro differences (about which I am not smart enough to comment), one simple but persistent point of comparison has been the fall from the peak.  In 2008-09, at the bottom of the fall, the BSE Sensex closed ~60% below the peak.  In 2020, at the lowest point thus far, it closed ~38% below the peak.  Consequently, many people feel that, at this point, the present crash isn’t as severe as the 2008-09 fall. 

While I don’t argue with that comparison, to me, a better indicator of the severity of what has happened, is the number of years of growth/ returns that have been wiped out.  If we go by that, the ~38% fall in 2020 appears to be a lot more severe than the ~60% fall in 2008-09.  Here is some evidence.

In 2008, the BSE Sensex attained its peak closing on 8 January.  The Price Return Index (PRI), which most people follow, closed at a level of 20,873, while the Total Return Index (TRI) was at a level of 25,756.  14 months later, on 9 March 2009, the BSE Sensex hit rock bottom (PRI: 8,160; TRI: 10,216).  Looking back from there, the TRI first crossed this level on 27 September 2005.  What this means is that the 14 month fall of ~60% wiped out roughly 2 years and 3 months of growth and dividends.  To put it differently, as on 9 March 2009, a one-time long-term investor in an index fund (tracking the BSE Sensex) would have lost, all-in-all, up to 3 years and 5 months of his/ her investment tenure, with no return to show for that period.

Now let’s look at what happened this year.

The BSE Sensex had its peak closing this year on 14 January (PRI: 41,953; TRI: 61,231).  The lowest closing point, thus far, was roughly 2 months later, on 23 March (PRI: 25,981; TRI: 38,017).  The TRI had first crossed this level way back on 31 October 2014.  What this means is that as on 23 March 2020, the 2 month fall of ~38% had wiped out 5 years and 3 months of growth and dividends.  Or to put it as previously, as on 23 March, a one-time long-term investor in a BSE Sensex index fund would have lost up to 5 years and 5 months of his/ her investment tenure, with no return to show for that period.

But what of investors who did SIPs?

Sadly, the difference is a lot more.

If you had started a SIP in a BSE Sensex index fund, 7 years before the market bottomed out in 2008-09, then at that point, (~60% below the peak), you would have been sitting on an annualized return of over 8% p.a.

On the other hand, if you started that SIP 7 years ago, then as on 23 March 2020, the value of your investment would be less than what you cumulatively invested.  Since then the markets have moved somewhat upwards, and that SIP might currently be showing a marginally positive return. 

In that backdrop, there are several things worth thinking about.  Here are a couple of them.

Firstly, there’s our perception of risk.  While investing in equities, were we thinking of risk in the way as shown above?  If not, I’d say that there is a case for us to do so.  Fact is, this risk is inherent to investing in equities and cannot be wished away.  Its magnitude may vary.  As it happens, many years ago, after the Tech bubble burst (followed by 9/11), the BSE Sensex fell to a level that it had first touched over 9 years earlier.  None of this matters if we exit at a relative high, so to speak.  If we are fortunate, we may get to do so.  But of our own, many of us can’t, and that brings home the importance of having a well-thought-out asset allocation.

Secondly, there’s our perception of SIPs.  These are largely sold, and bought, based on optimistic assumptions/ projections of returns, with little or no discussion of risks.  Pitches such as “SIP karo, mast raho” are at best, dubious, and at worst, dangerous.  SIPs are primarily a saving strategy, not an investment strategy.  They are not a substitute for a proper asset allocation.

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