One year after stock market crash: lessons learned

Published: March 23, 2021 at 4:45 pm

Last Updated on December 29, 2021

One year ago, on March 23rd 2020, the stock market stopped falling in fear of the global economy coming to a standstill due to the pandemic.  From Feb 18th 2020 to March 23rd 2020, the Nifty fell by 36.5%. On March 23rd 2020 we saw the biggest intraday fall 0f 13.5%. The 10-year Nifty SIP Return fell to 2.3%, 14-year SIP Return fell to  5%. Even in May, my equity retirement portfolio XIRR was only  2.75% after 12 years! Here are some lessons from the episode.

1. “stay invested” is not wisdom. It is hindsight bias

On March 23rd 2020, no one could have predicted the Nifty will zoom by 94% in the next 12 months. So people who point to this growth and claim, “this is why you should stay invested” are afflicted with hindsight bias. In fact, we know that the fall ended on March 23rd 2020 only in hindsight.

Another “fact” in hindsight, while it happened it felt like 2008 all over again, but no it is not!

Sensex log scale crashes
Sensex log scale crashes

2. Waiting for recovery is leaving it to luck

The recovery could have taken years or even if there was a recovery, subsequent movement sideways for years. So “waiting” is simply leaving the fate of your hard-earned money to luck. Yes, some people should stay invested; some people should wait but only after evaluating if one can afford to do so.


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A better plan to have a plan that can handle any kind of return sequences. Have a plan that involves not just systematic investing but also systematic risk management via a variable asset allocation plan. Start investing the right way with this free seminar: Basics of portfolio construction: A guide for beginners

stock market vs portfolio
stock market vs portfolio

3. There is no compounding in mutual funds or equity. Only confounding

Yes, the stock market moves up over the long term (so does gold) but that does not mean you will get “high returns”

See: Don’t get fooled: Mutual funds have no compounding benefit!

power of compounding vs power of confounding
power of compounding vs power of confounding

4. This too shall pass!

This was drawn in Dec 2020. I think it has passed!

This too shall pass!
This too shall pass!

5. Beware of CAGR/XIRR/Annualised returns! All of them are in hindsight!

When someone says they made 15% over the last year, we must stop and recognise that it is a point to point evaluation of growth in hindsight. The journey is almost always forgotten.CAGR

CAGR!

6. When the going is good, no one complains; When the going is bad …

Okay, this is with reference to the six closed debt mutual funds and not the stock market.

Returns positive and negative
Returns positive and negative

7. If you want the rainbow, you have to put up with the rain

Risk without reward
Risk without reward

8. If you say there is a “pattern”, there is!

When you read about self-similarity and fractals, you start seeing them everywhere! Also, see: Five Books That Will Redefine Your Understanding of Stock Markets

self-similarity
self-similarity

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Pattabiraman editor freefincalDr M. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over nine years of experience publishing news analysis, research and financial product development. Connect with him via Twitter or Linkedin or YouTube. Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation for promoting unbiased, commission-free investment advice.
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Most investor problems can be traced to a lack of informed decision-making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, what would it be if we had to groom one ability in our children that is key not only to money management and investing but to any aspect of life? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parents plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
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