Do you remember the crash of 2008?

by Manshu on July 27, 2010

in Articles

The markets have been doing well lately, and people are getting interested in stock markets again. We have yet to reach the highs made earlier, but now the question on people’s mind is when rather than if.

2008 jolted a lot of people who were heavily invested in equities, and this chart of the Nifty is pretty good at explaining why.  image

There were a lot of people who not only made money in stocks, but also regarded themselves as geniuses, and their portfolio was proof of their talent.

The fall not only took their money away from them, but also showed that they had just been lucky to ride the bullish wave.

That realization scarred a lot of people, and in India where equities are often related with making a quick buck, or gambling, people were only too willing to get rid of the vice, and pull their money away from the market.

Now, the market is doing well, and people are getting back in the game. There is nothing wrong with investing in equities, but you need to be aware of the fact that the market can be really volatile in the short run, and can give you extreme heart-ache with very little warning.

The Nifty returns chart below shows returns for the calendar years 2002 through 2009. This further highlights why the crash of 2008 was so bad. Things were going along so well for the past few years, and suddenly everything fell apart.

image

Over these 7 years, the market returned at a CAGR of about 15%, and if someone were to keep at regular investment through say a systematic investment plan, then they would come out in pretty good shape today.

But most retail investors don’t have such a long horizon when investing in equities, and exit at precisely the wrong time.

If you have stock investments, and plan to continue investing in the market, then the above chart is a good reminder of how one bad year can ruin your investments, and why having a long term horizon in equities give you stable returns when you look at it for a period of several years.

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