Last Updated on January 20, 2016 at 4:56 pm
Are we now in a bear market? The Senex has fallen 8% this month and 14% the last year. If you had invested a lump sum at the end of May 2014, it would given close to nothing or even a small loss. Does this mean we are in a bear market now?
This is a post I wrote on Sep. 3rd 2014, titled Anatomy of a Bull Market. Let us first find out how bad a bull market can be, before concluding anything about current market conditions.
The markets are on fire this year. For many, including me, this is the first bull market. We have all made phenomenal gains and hope the run will continue. However, between early Jun to early Aug 2014, the market went nowhere. All though relative to the long history of the market and relative to any long-term goal like retirement, this period is like a blink of the eye many were concerned!
When the markets moved northward after that they were worried about the ‘new highs’. Soon followed questions like, ‘should I continue investing?’, ‘can I start a SIP now?’, ‘should I book some profit?’, ‘should I rebalance now?’ etc.
If this is a bull market, we have been in one since the middle of 2012. If this is a bull market, I think it would serve us all well if we examined the previous bull run. Hopefully, this will prepare us better.
First let us start at a plot of the Nifty and it PE between 25th April 2003 to 14th Dec. 2007.
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Notice the prominent dips as the market moved up. They were mini crashes as they occurred with a month. Investors who got scared and pulled out during these dips would not have benefited from the rest of the run.
Who could blame them? Have a look at the monthly gain or loss chart
None of the monthly losses in the past 1Y or so are even close to these huge dips!
During the bull run, the market moved up by about 10% each month on an average, but there were prominent losses. Over some months, the Nifty lost close to 10% (4 time), 20% (once) and 30%(once).
Now let us look at how the CAGR of a lump sum investment made at the start of the ‘bull run’ would have evolved.
From euphoric triple digit highs the CAGR sharply dropped to settle down around 50-60% range! With each prominent monthly loss, the CAGR dropped down noticeably.
The final CAGR at the end of the period was 56%.
This is how a SIP made during this period would have evolved.
Total investment: 1000 x 55 (months) = 55000
Total Value: 1,53,511
CAGR (final): 46%
This is how the CAGR evolved after each installment of the SIP
The initial high values observed are normal. CAGR becomes reliable only after 1 year.
Notice that at one point the CAGR dropped to 11%. Again with each prominent monthly loss, the CAGR dropped down noticeably.
A bull market is no joyride.
The market is likely to correct itself from time to time, consolidate and only then move up.
The corrections would be violent, leading to significant losses. Whether these losses or notional or real depends on the grit of the investor.
Why are the markets falling? I don’t know and I don’t care. I intend to continue investing in the same way as before. Systematically ensure my investible surplus is invested as per the asset allocation of my financial goals.
Are we now in a bear market? I don’t know and I don’t care. In any case, the bull market is as bad as the bear market. So does it even make sense to ask in real time? Hindsight is of course 20-20, the only reason I could write this post!
I will conclude with two relevant quotes:
“I’m not telling you it’s going to be easy – I’m telling you it’s going to be worth it.” ― Art Williams
“Fasten your seatbelts, it’s going to be a bumpy night” ― From the movie “All about Eve”