Last Updated on December 29, 2021 at 5:33 pm
The real risk associated with equity markets is not a huge fall. That often results in a strong upward movement sooner than later. The real risk lies in lost time when the market heads nowhere. Over 10 years, 15 or 25 years, one could make huge absolute gains but poor annualised returns if we hit upon an extended sideways market.
A sideways market is one in which the index neither moves up or down too much. Naturally one can talk about a bull run or bear run or sideways market only by looking at the rear-view mirror, but that is how it is with our returns too.
After the Harshad Mehta scam broke, the Sensex went nowhere for 10-years. That was our very own lost decade as the govt was bankrupt (hence EPF, PPF gave 12%) and the economy just starting to open up.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
🔥Enjoy massive discounts on our robo-advisory tool & courses! 🔥
Consider this bizarre example: A man buys one unit of Sensex (let us assume index investing was possible then) just days before the Harshad Mehta scam broke on 30th March 1992 with the index at 4091.43 (arrows below). Over the next 25 years, he kept his unshakable faith in Equity and held on to his investment, no matter what. Finally, on 24th March 2017 with the index at 29421.40 (619% increase), he checks the annualized return he has got. What would be the result of this calculation? This is before dividends. Add 1.5% to 2% to the return due to dividends.
That is 8% return before dividends! Is the sufficient reward for “patience” and “discipline”? Naturally, when I offer this example, investors and especially sales guys complain, “this is cherry-picking. Average returns are much better”.
“Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average. It’s not sufficient … to survive on average. We have to survive on the bad days.” — Howard Marks.
Our financial plan has to be prepared for the worst-case scenario. Let us consider two more examples. The Sensex closed on 4084 on Feb 22, 1994, and was 20464 on Feb 17, 2014. Again, if you look at only that information, it seems awesome – a 400% increase but the annualised return is only 8% (excl dividends but that does not mean much, see below).
The reason for the poor returns despite huge absolute gains is “time” or “bad timing” or “timing luck”. While the annualised return calculation assumed a smooth increase as the brown dots below, in the real world, our investment growth can be delayed by a poor sequence of returns.
Observe how sideways market of the 90s affected growth significantly, much more than than the 2008 crash. A more recent example including dividends would help.
This also has been cherry-picked: after the 2008 recovery and before the 2020 crash. The Nifty TRI moved from 6168 on 18th Sep 2009 to 15412 on 15th Sep 2019, 150% gain but only 9.6% annualised return. The dates are marked in red dots below.
It is about 4+ years for the market to move up out of the total 10-years and some month were lost in fall and recovery after that, leading to poor returns (this time including dividends).
This is the full 10-year rolling returns graph with annualized and absolute returns. Absolute returns do not factor time and so even after the 2020 crash when XIRRs was 5-6%, the gain was 75-80%!!
How should investors tackle a sideways market?
A sideways market is an opportunity, but not your friend!
- When a sideways market occurs at the start of an investment journey it is a great time to invest in equity. However, if it lasts too long, then returns will suffer.
- While a return estimate is necessary to determine “how much to invest”, it is better to base that estimate with severe examples as above or at the very least be conservative.
- Since returns are not in our control, the only way to get close to the corpus required for a future expense is to (a) invest enough systematically (b) vary asset allocation or reduce equity exposure systematically.
- The lectures on goal-based portfolio management answer this specific question; how to manage a portfolio so that we can handle any sequence of return: bull, bear market or sideways market.
🔥Enjoy massive discounts on our courses, robo-advisory tool and exclusive investor circle! 🔥& join our community of 7000+ users!
Use our Robo-advisory Tool for a start-to-finish financial plan! ⇐ More than 2,500 investors and advisors use this!
Track your mutual funds and stock investments with this Google Sheet!
We also publish monthly equity mutual funds, debt and hybrid mutual funds, index funds and ETF screeners and momentum, low-volatility stock screeners.
- Do you have a comment about the above article? Reach out to us on Twitter: @freefincal or @pattufreefincal
- Have a question? Subscribe to our newsletter using the form below.
- Hit 'reply' to any email from us! We do not offer personalized investment advice. We can write a detailed article without mentioning your name if you have a generic question.
Join 32,000+ readers and get free money management solutions delivered to your inbox! Subscribe to get posts via email! (Link takes you to our email sign-up form)
About The Author
Dr 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 ten years of experience publishing news analysis, research and financial product development. Connect with him via Twitter(X), 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 promoting unbiased, commission-free investment advice.Our flagship course! Learn to manage your portfolio like a pro to achieve your goals regardless of market conditions! ⇐ More than 3,000 investors and advisors are part of our exclusive community! Get clarity on how to plan for your goals and achieve the necessary corpus no matter the market condition is!! Watch the first lecture for free! One-time payment! No recurring fees! Life-long access to videos! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Our new course! Increase your income by getting people to pay for your skills! ⇐ More than 700 salaried employees, entrepreneurs and financial advisors are part of our exclusive community! Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show you how to achieve this by showcasing your skills and building a community that trusts and pays you! (watch 1st lecture for free). One-time payment! No recurring fees! Life-long access to videos!
Our new book for kids: “Chinchu Gets a Superpower!” is now available!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook is for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Do you want to check if the market is overvalued or undervalued? Use our market valuation tool (it will work with any index!), or get the Tactical Buy/Sell timing tool!
We publish monthly mutual fund screeners and momentum, low-volatility stock screeners.
About freefincal & its content policy. Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on mutual funds, stocks, investing, retirement and personal finance developments. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than three million readers a year (5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified with credible and knowledgeable sources before publication. Freefincal does not publish paid articles, promotions, PR, satire or opinions without data. All opinions will be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
- Twitter @freefincal
- Subscribe to our YouTube Videos
- Posts feed via Feedburner.
Our publications
You Can Be Rich Too with Goal-Based Investing
Published by CNBC TV18, this book is meant to help you ask the right questions and seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want
This book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.Your Ultimate Guide to Travel
This is an in-depth dive into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, and how travelling slowly is better financially and psychologically, with links to the web pages and hand-holding at every step. Get the pdf for Rs 300 (instant download)