One year after stock market crash: lessons learned

Published: March 23, 2021 at 4:45 pm

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.

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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About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
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