“Nothing. Sometimes nothing is the hardest thing to do” – A perspective on how to handle stock market declines

Published on:Oct 24th, 2018

The current stock market scenario reminds me of this line from Game of Thrones – “Nothing. Sometimes nothing is the hardest thing to do.”

The fall in the Indian stock market over the last month has caused jitters amongst the investors. Investors are scrambling to find the right strategy to handle this fall and are looking for “expert” opinion to wade through this crisis.

I am not going to make any prediction on where the market is heading. However, time and again we have seen that the stock markets have handsomely rewarded investors who have a long-term investment horizon and hold on to their stocks during such market falls and do nothing.

To test this theory for the Indian stock market, I analyzed the data for Nifty 50 since the beginning of this millennium. So, I pulled the data for about 19 years and used four holding periods viz. 1 year, 3 years, 5 years and 10 years for this analysis. Some of the key findings are as below:

There was never an instance of a negative return when the holding period was 10-years, whereas there was a 27.83% probability of a negative return when the holding period was 1-year.

One might be tempted to believe that the downside protection that one gets by investing for the long term is at the cost of sacrificing some of the upsides. But that theory does not seem to hold firm, as in the case of the 10-year holding period there is a 73% percent chance of making an annualized return over 10%, whereas the same for the one year holding period is only a 56% chance. However, for the 1-year holding period, there were a lot more cases of 20% plus returns.

The annualized return is never less than 5% when the holding period is 10 years and the chance of a negative annualized return when holding for 5 years is a slim 1.15%. This statistic points out to the resilience that the stock market could show provided we have a long-term investment horizon.

There is a general perception especially among Indian households that investing in real estate is a safe bet and the stock market is risky and is even tantamount to gambling. The reason investing in real estate seems safer is because no investor buys a house today and sells it tomorrow and there is no daily quote for the price of the house. It is true that most players operate in the stock market just as they would do in a casino. However, it is in our hands to turn the odds in your favor by investing and simply holding on to our stocks. Liquidity in the stock markets is a double-edged especially to retail investors who react to every small news or opinion from the so-called experts. The media plays a huge role in this as well, with their attention-grabbing headlines for every fall in the market. So, the next time your financial advisor or stockbroker suggests you sell and buy a different stock in your portfolio, it is very likely that it wouldn’t turn out to be a profitable exercise. If one can stomach this temporary fall in the market, and stay put, history suggests that such a move would be rewarded.

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