Keep calm, stay invested…this too shall pass

When markets decline and fear sets in, investors feel it is better to sell off investments and shift to cash, with the hope of getting back in when the market outlook feels more promising.

After 29 years, the Nifty 50 has had the longest losing streak with a continuous correction over the last 5 months. At present the Nifty 50 is down by 15 per cent from its peak in September 2024 while the Nifty Midcap 150 is down by 19 per cent and Nifty 250 smallcap is down by 24 per cent.  

The market downturn is driven by various factors like FII selling, impact of tariff changes, valuations and weak GDP worries. In times of increased volatility, it is natural for investors to worry about the value of their investments falling and make a hasty exit. Is a bear market (>20 per cent fall)  in the offing is the question on everyone’s mind. 

When markets decline and fear sets in, investors feel it is better to sell off investments and shift to cash, with the hope of getting back in when the market outlook feels more promising. 

However, timing the market seldom works. This is because markets are unpredictable and the best returns could happen anytime. Data from January 1991 to February 2025 shows that by missing the best 30 days in this period, would reduce the CAGR from 13.3 per cent p.a. to 5.9 per cent p.a.. Missing the best days during the downturn and the subsequent upturn can have a large impact on the returns generated in the subsequent period.

Historically, sharp declines in stock markets are typically brief, while significant gains often come in clusters. It’s not uncommon for a major gain to follow a large drop or vice versa. Phases of short-term volatility are generally followed by a steady upward trend over the long term. This phase too shall pass though it may give more pain in the interim. 

At this point, it is important for investors to earmark their investments to financial goals. Even if investors have been investing for quick returns, they need to have a change in strategy and allocate these investments to various goals. Linking investments with financial goals will give investors a clearer picture of how long they can hold their investments. If the funds can indeed be held for longer period, investors need not worry and can stay put. 

Although dealing with uncertainty and intense market volatility is tough, it is crucial to keep the big picture in view and remain focused on what can be controlled – where, how much and for how long to invest. In fact, it may be a  good time to add further investments. A well-diversified portfolio, aligned with a level of investment risk and kept invested, is likely to generate better returns than constantly jumping in and out of the market based on short-term declines.

Real wealth is built during downturns, not upturns.