What to do when markets fall 2% in a day?

What to do when markets fall 2% in a day?

This week started with a wobble. The Nifty index was down -2.14% on Monday. It might seem like a big down move, but such market moves are more common than one would expect. Since 1991, the Nifty 50 Index has seen quite a few declines of -2% or more in a day. On average, the index has a -2% down move every 15 trading days. Some years see more -2% down days than the others, but just because they have been infrequent in the recent past does not mean we become comfortable that it cannot happen.

The chart below shows the number of trading days every year that the index lost -2% or more.

So we had years like 1992, 1998, 2000 and 2008 that saw more than 30 such days where the market fell more than 2%. In 2008, the market fell more than 2% on 61 trading days – that is roughly one out of every four trading day.

So how did investors on Kuvera react to this move? As expected our investor base has shown remarkable maturity. We do not see any rush to stop SIPs or to sell and withdraw investments.

If anything we saw a big 3.2x jump in lump sum investments on Monday over our daily average. It is not for nothing that we say Kuvera is where the smart investors are.

There are two clear takeaways from the above

1. Large down moves happen more frequently than we would expect. Just because it hasn’t happened in the recent past is no reason to believe it won’t happen again.

2. The long-run returns of the index include such down days. When we say the Index returned 14% since 1991, it includes all of these negative 2% days. We cannot predict when they will happen but if we stay invested through them we will get superior long term returns.

And, as always our long term advice does not change 

1. If you promised yourself you will buy on dips

2. If you promised yourself you will run the SIP for 15 years

This is the time to honour that commitment. Stick to your plan.

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