Why you should worry about the latest market crash

At a point when the Sensex has fallen by 5,000 points — that’s by 25 per cent — from over 20,000 in early January to 15,000 today, why should a 500 point fall make news? Because these 500 points bring out the first sentiments of investors: fear and greed.

History tells us that we’ve lost money in earlier falls, the greed years of the dot-com boom, for instance. Then, some of the tech shares that quoted at over Rs 1,000 could be picked up for a few paise. Many investors are still holding on to them, in physical form, waiting for them to rise to their previous levels — or at least to Rs 500 or thereabouts so that the investment can be salvaged.

The bad news is that that’s not going to happen in their lifetimes.

Meanwhile, a bigger but unseen destroyer of wealth — inflation — is slowly and surely but invisibly chomping away the value of their investments. The value of Rs 1 lakh that an investor put into the market in 2000 when it crashed would be worth Rs 1.53 lakh, if it only matched inflation. At 8 per cent return, the value is Rs 1.85 lakh. This extra Rs 31,000 is what the investment would have delivered through a risk-free return from the post office. Adjusted for inflation, this would have given the investor a return of 3.5 per year over eight years, something that bespectacled economists term the ‘real rate of return’.

Inflation, then, hovered in the 3-7 per cent range. Today, at 8.2 per cent and rising, the real rate of return is already negative. The rising prices of crude oil are making it worse. Markets are tumbling not only in India but the world over. What is an investor to do? Buying now is scary. Selling now is scarier.

These buy-sell problems can be over the moment you are clear about why you invested in the first place and what you bought. If the reason to invest was a financial goal some five to ten years away, sleep in peace. If you researched the company or the fund, you can even snore. If not, welcome to the nightmare.