Surviving the Market Crash: A Guide for Investors in Times of Panic

SUMMARY

In volatile markets, investors often experience fear and anxiety. However, this is not the first steep correction in market history. Markets have previously rebounded from similar situations and rewarded investors in the following months.

Global markets experienced significant downturns due to an escalating trade war between the US and its trading partners. Major indices such as the Dow Jones, Nikkei, Hang Seng, and NASDAQ dropped over 10% in just two trading days following the announcement of tariffs. This situation has heightened investor anxiety, with growing fears of a looming US recession that could potentially have global repercussions.

Historically, markets are reacting as they have in previous crises, such as the dotcom bubble of the 1990s, the sub-prime crisis of the late 2000s, and the COVID-19 pandemic.

What sets a seasoned investor apart is their ability to evaluate and respond to these situations effectively.

In his latest book, "Same as Ever," author Morgan Housel eloquently describes the cycle of fear and greed:

First, you assume good news is permanent.

Then you become oblivious to bad news.

Then you ignore and deny bad news.

Then you panic at bad news and accept it.

Then you assume bad news is permanent.

Then, you again become oblivious to good news.

Then you ignore and deny good news.

Then you accept the good news and think it is permanent."

And the cycle continues.

Applying this cycle to the current scenario, investors initially believed the good news was lasting, with a major market crash seeming unlikely after the COVID era. They overlooked the bad news, assuming that Trump's tariffs, the global trade war, and earnings contraction would have only temporary effects on the markets.

Now, with significant market declines, investors are fearful, and some may believe this will persist. That's when positive news emerges. It can come from any direction, and as investors, we must not overlook it. Historically, markets have often performed better after experiencing sharp corrections.

Here's how the NIFTY50 performed in the six months following severe corrections (-10%):

May 2004

After the NDA government lost the 2004 general elections, the NIFTY50 dropped over 20% in two sessions, falling from 1,720 to 1,290. However, the index rebounded by 33% to 1,760 within the next six months, recovering all losses.

May 2006

In May and June 2006, the NIFTY50 fell over 25% amid corrections in global emerging markets, dropping from 3,557 to a low of 2,597. Six months later, the index rose to 3,962, gaining 52% from its lows.

October 2008

During the Global Financial Crisis, the NIFTY50 fell more than 22% over two sessions in late October. Six months later, by April 2009, the index jumped over 50% from its lows, climbing from 2,252 to 3,465. The decline initiated in January but reached its lowest point in October when global markets collapsed.

March 2020

The COVID-19 lockdown triggered market fear, causing the NIFTY50 to plummet nearly 35% in March 2020, from 11,990 to 7,550. However, by September 2020, the index had recovered to 11,900, demonstrating a strong rebound.

These instances illustrate that markets have typically regained most losses within six months. Will this pattern repeat? The answer is uncertain, dependent on numerous factors beyond our control. Recovery could take six months or longer. However, data indicates that markets have shown resilience post-crisis as governments and central banks implement policies to address the situation, eventually improving performance.

Despite volatility, panic, and fear, such times have historically rewarded investors significantly. Many seasoned investors look for opportunities during these periods to increase their investments. Yet, no one can predict the market's lowest point or when it will start to rally. Investors should heed the advice of renowned investor Warren Buffet: "Be fearful when others are greedy, and greedy when others are fearful."