So you think you have become financial literate by starting equity mutual fund SIPs assuming that they will beat inflation in the “long run”? Don’t get too comfortable with equity. Don’t assume those fairytale returns from DSP nanocap fund will last. This is how a real market crash “feels” like.
Preparing for a presentation can be really fun when you have to make all new slides. I got a gig at the RBI staff college next week and as I was preparing to give the audience post-lunch indigestion speaking about the market-risk, I thought it would be a good idea to turn them into a series of posts about risk (what else!) and what we need to know about the great industry/media propaganda – the SIP.
In part one, I simulate a “real” market crash.
First, we start with the NAV movement of Franklin Prima Fund
Excuse the reference to “blue dots” that is a cut and paste overkill.
Now, let us look at this in the proper perspective by using a logarithmic scale. This will divide the vertical axis into equal sized chunks. I prefer the log to the base 10 rather than the usual log to the base e (or ln) as it is more granular. Those who are new to these type of plots may consult this post: Are you ready to climb the Sensex Staircase?!
Notice that the recent increase does not seem so steep because now you can see that relative to past growth. Now let us focus on the dot-com crash.
This is how the NAV fell. Those who consider a 1% o r 2% drop as a crash may kindly imagine what this would do to a portfolio.
Now, I would like to imagine the above % monthly change in NAV to be repeated from next month on. Of course, this is a pure speculation based on cherry-picked data. But cherry-picking reward is different from cherry-picking risk. The former is delusional and the later dreadful. And I would always choose the latter.
Fasten your seatbelts!
The red dots are simulated. Why is a crash that “looked” so mall in 2000 appearing so gigantic now? Again, because we are not looking at in the right perspective.
Both the crashes are essentially identical. The heights of both arrows are the same. This si the power of the log scale (log 10 scale to be precise due to the 0.5 granularity in the vertical axis.
The standard log to the base e or (ln) graph will look identical but notice the y-axis.
Please do not assume this crash simulation is a fantasy.
Please do not assume the SIP corpus will ensure market will never crash. That is garbage. If and the when the FIIs pull out, the market will head south. As simple as that.
So what would happen to the great SIP due to such crashes? To be continued …..
Ps. Of course this, is a simplistic illustration of a crash. The point is, to be forewarned is to be forearmed.
Ask Questions with this form
And I will respond to them in the coming weekend. I welcome tough questions. Please do not ask for investment advice. Before asking, please search the site if the issue has already been discussed. Thank you. PLEASE DO NOT POST COMMENTS WITH THIS FORM it is for questions only.
[contact-form][contact-field label=’Name’ type=’name’ required=’1’/][contact-field label=’Email’ type=’email’ required=’1’/][contact-field label=’Comment’ type=’textarea’ required=’1’/][/contact-form]
GameChanger– Forget Startups, Join Corporate & Live The Rich Life You want
My second book, Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want, co-authored with Pranav Surya is now available at Amazon as paperback (₹ 199) and Kindle (free in unlimited or ₹ 99 – you could read with their free app on PC/tablet/mobile, no kindle necessary).
It is a book that tells you how to travel anywhere on a budget and specific investment advice for young earners.
The ultimate guide to travel by Pranav Surya is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when traveling, how traveling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
You can Be Rich Too with Goal-Based Investing
My first book with PV Subramanyam helps you ask the risk questions about money, seek simple solutions and find your own personalised answers with nine online calculator modules.
The book is available at:
Amazon Hardcover Rs. 271. 32% OFF
Infibeam Now just Rs. 270 32% OFF. If you use a mobikwik wallet, and purchase via infibeam, you can get up to 100% cashback!!
Flipkart Rs. 279. 30% off
Kindle at Amazon.in (Rs.271) Read with free app
Google PlayRs. 271 Read on your PC/Tablet/Mobile
Now in Hindi!
Pre-order the Hindi version via this link
Connect with us on social media
- Twitter @freefincal
- Subscribe to our Youtube Videos
- Posts feed via: Feedburner
- We are also on Google PlusandPinterest
Do check out my books
Get it now. The Kindle edition is only Rs. 199.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantMy second book is now only Rs 199 (Kindle Rs. 99) Get it or gift it to a youngearner
The ultimate guide to travel by Pranav SuryaThis is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for ₹199 (instant download)
Free Apps for your Android PhoneAll calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)