When ever the market falls, people are curious about my portfolio. They want to know how my portfolio is handling the crash (according to them). I shrug my shoulders and reply “same old”. Yes, that is pretty much my attitude whether the market is going up or down or under. The portfolio is doing exactly what it is supposed to do. Actually, to tell you the truth, the market is certainly not crashing. It is just a correction, at least so far. May be if it falls a lot more from here, I may call it a crash.
The market is reacting normally to the current events, namely high inflation and RBI’s intervention to increase repo rate to control inflation. Nothing out of the ordinary or unexpected happened. Really, we were all expecting a rate hike given the persistently high inflation and also anticipated the consequent fall in the stock market.
What has not been normal is the people’s reaction to such a minor correction. This has always been the case. On every minor correction some people will start worrying about losing money. Those are the people who certainly should not be in the stock market. They are better off handing over the financial management to a capable financial planner. Yes, my investments are down and I have lost a few lakhs in the past few days from the peak. The last part of the sentence “from the peak” is the most important part of my answer :).
Of course, if you compare anything with the absolute peak, it will look like the value has gone down. But really, is this how we should be thinking? The reason this happens to people is because they monitor their portfolio every day or very frequently and that is precisely why they know what the peak value of their corpus was. However, investing should not be about the peaks. It should be about a distant past. I generally recommend comparing your portfolio with at least 7 years ago data. Even if you compare it with 5 years ago, your investment should have been higher than what it was back then.
How do I know? Well take any good index and look at its value compared to 5 years ago. Let us consider a more volatile index like S&P BSE midcap. In a falling market you would expect the midcaps to fall more right? Well a point-to-point comparison of the index from 5 years ago will tell you that your investments should have gone up by 45% even after the recent major fall. So you had Rs. 10 lakhs 5 years ago, then the value today would be Rs. 14.5 lakhs! What loss are you talking about?
No, I did not cherrypick S&P BSE midcap index to show it is in the green. If you see S&P BSE smallcap or Nifty or Sensex, all of them are more positive. In fact Sensex is 75% higher than it was 5 years ago, so yeah, I am not sitting on a loss for sure. Everyone knows that stock market investments should be done with a long term view. But here is the kicker. Even if you look back 1 year ago and compare your investments, you should still be in the green! So don’t worry, this is not a market crash yet. It is just a correction and if someone tells you otherwise ignore them.
In conclusion, don’t compare your investments from the most recent peak or the highest peak. Look at it as a long term investment. Of course in the short-term it may go down, but in general it tends to go up in the long run. More importantly don’t look at your portfolio everyday. That is the only way you would know what your peak corpus value was isn’t it? Even if you check your portfolio everyday (like I do), don’t fret when there is a small fall like the one we are currently noticing. A 20% fall is to be expected when the economic news is bad.
Finally if you ask me, I still think that the market is slightly over-valued if you look at price to book numbers. Of course there are many who tend to disagree with me, which is perfectly fine because you have to come to your own conclusion based on your experience and knowledge. In their defense, if you look at price to earnings, it looks slightly undervalued. Make what you will of that :). What do I know anyway.
All I can say is that I won’t even bother thinking about my portfolio as long as my 1 year returns are still positive. I will certainly not panic until the 5 year return is red. We are still a long way away from that. I check the value of my portfolio everyday and I can precisely tell you what my peak corpus value was. Yet I don’t compare my returns with the peak. You shouldn’t too.