The Sensex was touching new highs. Social media were full of screenshots of profits. Friends, colleagues, even distant relatives were talking of how the stock market was the quickest path to building wealth.
So, like most people, you got in. You initiated multiple SIPs across funds. And at first, it felt like that was the most dramatic thing you would ever do. Returns of upwards of 20% made investing look easy.
Then came the mood swing. Markets slumped. Volatility rose. Your SIP returns started sliding, slowly but surely, from double digits to single digits. Some funds even went into the red.
Suddenly, optimism turned into anxiety. News headlines became gloomy. WhatsApp groups turned silent. And a thought began to creep in, should I pause my SIPs until things improve?
It makes sense psychologically: Why continue to invest when markets are not performing?
Market expert Dhirendra Kumar of Value Research feels that it is precisely at this point that most investors tend to make a mistake. "When markets fall, people tend to stop their SIPs. In a recent mailer, Kumar wrote that "stopping SIPs during market declines undermines the whole process that makes SIPs so effective."
The concept used in SIPs is quite simple but very effective. During the downturn in the market, the fixed amount in SIPs buys more units, and when the market rises, the fixed amount buys fewer units, thereby reducing the average cost over a period of time.
This data from Value Research reveals a clear trend. Those investors who remain consistent with their SIPs during downturns purchase more units at lower prices. Once the market turns around – which always happens in the past – these investors end up with a larger corpus as well as higher returns.
However, the investors, who halt their SIPs to wait for the right time, enter the market again when it is already pricey. According to Dhirendra Kumar, they essentially end up buying umbrellas after the monsoon.
Dhirendra Kumar suggests three rules to avoid expensive blunder.
First, you must, at all costs, keep your long term SIP investment amount separate from your emergency funds. This will ensure that you do not make any emotional investment decisions based on the volatility of the market.
Secondly, you should determine your SIP strategy while you're not investing through emotional moments, and you should not change it based on market noise.
Third, learn to look at market crashes as discounts and not disasters. The true riches are generated when one is consistently invested during the times of maximum fear.
The market falls to test patience, not intelligence. SIPs pay for patience, not for timing. And if your plans are long-term, then halting your SIPs during market downturns could prove costlier than market losses ever can.
Markets test your patience and not your smarts.
