Enquiries
At this moment, we face a season of great crises in the world.
The global econmony including Indian economy suffers from intense volatility.
Already we have covered 2 parts of “How to Make Your Portfolio Recover Better & Faster from the Stock Market Crash?”
If you have not seen them, please read them now
How To Make Your Portfolio Recover Better & Faster From the Stock Market Crash? (Part 1)
In this 3rd part, we will see how can you play smart with your SIP to make your portfolio recover better and faster.
Have your SIP returns become negative because of the recent stock market crash?
Are you foreseeing unstable incomes because of the corona crisis and because of that would you like to stop your SIP?
Your dilemma and indecisiveness are very normal as we have witnessed huge volatility in the market.
Has this problem been there before? What happened during that time? Has the market recovered? What strategy has worked earlier w.r.t stopping or continuing or increasing SIP?
These are your questions. Yes, there have been market crashes earlier and they have recovered as well.
The market fell by about 50% in the year 2000 and the market fell by about 60% in the year 2008 and recovered later.
Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market. – Warren Buffett
Hence this 2020 market crash will also recover.
What’s the best to do during this time with your SIP?
This article will guide you on what to do with your SIP (Systematic Investment Plan) during this crisis.
Table of Content:
- 3 Available options for SIP investors
- What are those options?
- Analysing all the 3 options
- Experiment 1
- Insights from the analysis
- Experiment 2
- Insights from the analysis
- Final Verdict
- Key Learnings
- Conclusion
3 Available options for SIP investors
First of all, Let’s see the options available to you.
What are those options?
You have three options available:
- To Stop SIP
- To Continue SIP (or)
- To Increase SIP
You are free to make whatever choice you want, but you are not free from the consequences of the choice.
Choices often lead to confusion when decision making. You will not know what to choose. It’s a time taking process when you don’t know the market well and also don’t know what option will best suit your portfolio during a crisis.
Hence some choose whatever comes easy, rather than choosing what is right. With no much knowledge and thinking they jump to conclusions. Some feel stopping SIPs is easier while others continuing SIPs. Some would think why to increase SIP during the market crash as they assume it would lead to further loss.
“Do what is right, not what is easy nor what is popular.” ― Roy T. Bennett
But which among these options is right here?
Who among them is taking the right option here?
The who stops, one who continues it, or the one who increases it? Let’s check on it.
Analysing all the 3 options
Let us apply all the 3 options to the previous market crash data. Stock market has seen a similar crash in 2000 and 2008. During these periods let’s assume 3 investors had an SIP during these periods. Also we will analyse if they have chosen different options to stop / to continute / to increase sip, then what would have been the different results.
Let’s get into the experiment:
Experiment 1
Three investors A, B, and C invest Rs.10,000 SIP (Year 1999 to 2004) in Franklin India Bluechip Fund-G. Their approach to SIP however varies.
- Mr. A invests Rs.10,000 SIP and he continues his SIP.
- Mr. B invests Rs.10,000 SIP and stops SIP for 1 ½ years during the market fall.
- Mr. C invests Rs.10,000 SIP and increases to Rs.15,000 for 1 ½ years during the market fall.
Guess who would have got the highest returns.
Yes, you guessed it right if you said, Mr. C., From the above example, it is clear that Mr.C who increased his SIP during the market fall recovers the highest portfolio value at the end of the period when he sells it. He invested Rs.8,10,000 in total,i.e. Rs.10,000 every month for six years.
He increases his SIP from Rs.10,000 to Rs.15,000 for 1 ½ years i.e.
during the market fall. And at the end of six years, he sells it and his portfolio becomes Rs.20,73,721. An increase of 31.60% in the portfolio. The highest compared to Mr.A and Mr.B who continue and stop SIP respectively.
Insights from the analysis
From the above experiment, we derive that the investor who
- increases his SIP during market fall earns the highest portfolio value at the end compared to others who stop and continue SIP.
- Continues his SIP during market fall earns moderate return which is better than the return of who stopped the SIP
- Stops SIP makes the lowest return of all the 3 options.
This has happened between 1999-2004. You may have a question in mind like Will it still be the same in similar other market crashes? Did I hear you right? If yes, then here’s another experiment between 2007- 2012.
Experiment 2
A, B, and C invest Rs.10,000 SIP (Year 2007 to 2012) in HDFC Equity Fund -G. Their approach to SIP also varies.
- Mr. A invests Rs.10,000 SIP and he continues his SIP.
- Mr. B invests Rs.10,000 SIP and stops SIP for 15 months during the market fall.
- Mr. C invests Rs.10,000 SIP and increases to Rs.15,000 for 15 months during the market fall.
Even in 2007, Mr. C who increased his SIP during the market fall gains the highest portfolio when the market rebounds. He invested Rs.7,95,000 in total,i.e. Rs.10,000 every month for six years.
He increases SIP from Rs.10,000 to Rs.15,000 for 15 months i.e. during the market fall. And at the end of six years, he sells it and his portfolio becomes Rs.12,58,402. An increase of 14.82% in the portfolio. The highest compared to Mr.A and Mr.B who continue and stop SIP respectively.
Insights from the analysis
- From the above illustration too, we derive the same conclusion that the investor increases his SIP during market fall earns the highest portfolio value at the end compared to others who stop and continue SIP.
- Continues his SIP during market fall earns moderate return which is better than the return of who stopped the SIP
- Stops SIP makes the lowest return of all the 3 options.
In both these cases, i.e in the year 2004 and 2012, the person who increases his SIP during the market fall gains the highest.
I hope you got clarity after analyzing the above illustrations.
It is a similar scenario.
You have the choice with you either to stop, continue or increase your SIP now during the market crash. And it’s ultimately how you act when you are aware of all the facts that have happened in the past. As you already aware now what option will best suit your portfolio to increase your returns in the future, you are to make the right decision.
Better awareness leads to better choices. Better choices leads to better results.
From the above experiment, it is proved that increasing SIP during market fall can give you the best returns. The same applies now in 2020.
Final Verdict
As you saw in the experiments, in the past, there have been market crashes followed by recoveries. Hence it will recover now as well.
Each dawn declares that, there will be a bright day if there’s a dark night.
If you increase your SIP now, you will gain better when the market recovers. People with much market knowledge will choose to increase their SIPs during market fall and also earn a huge profit in the long run. If you are one among them, you would have by now chosen to increase your SIP.
If you instead chose to stop or redeem your SIP’s now, you will incur a loss or will not recover as much as you will recover, if you continued or increased your SIP.
If you get your income regularly and can survive the crisis, it’s better not to stop or redeem your SIP’s. This market crash is not permanent, but temporary. As seen earlier, if there is a fall there will be a recovery sooner or later. If your SIP has fallen in value, it’s only a temporary loss. But if you sell, the loss will be permanent. Stay calm and take advantage of the volatility.
What happens if you stop, continue or increase SIP?
-
✔ If you stop your SIPs, you will incur a loss or will recover very less.
✔ If you continue your SIPs, you will gain better than if you stop them.
✔ If you increase your SIPs, you will gain much better than if you stop or continue it.
Key Learnings
-
👉 Started SIP? Remain invested for the long term and don’t get carried by market fluctuations.
👉 A year is short to judge equities. Give it five to seven years to perform.
👉 Extending SIP’s to five years or more can increase returns.
👉 Link your SIPs to a goal and continue till you reach your goal.
👉 Continue your SIPs, if possible increase them now, to reap benefits when the markets rebound.
Conclusion
What have you planned for?
To stop, continue or increase your SIP?
As you now know all the facts in the past and what has happened during the previous market crashes, You know which option works best, so choose the best one to increase your returns. Think, Analyze, Understand and make a wise choice. Continue your SIPs and if possible try to increase them now, for better returns in the long run. This is the time for you to act prudently. Happy investing!
