Who should worry about this equity market crash now?

As you are aware, the Indian equity market is down by more than 17% from its 52weeks high.  For the last few days, we are seeing correction in market almost daily. Global markets are also correcting heavily.

There are many reasons for this correction. High inflation, increasing interest rate, war between Ukraine and Russia are the main reasons.

If you have invested in equity mutual funds, you are seeing its impact on daily Net Asset Values of the funds.

Is it better to stop investing in mutual funds? Can I withdraw my investments even at a loss?  Can I stop my SIPs and start later? Many new investors are worried.

Is it a reason to worry? Who should worry about this market crash?

Let’s understand it from the perspective of different type of investors.

Senior Citizen, retiring now at age 60

In his case, the only financial goal is Retirement Planning. Let’s assume he is looking for an inflation adjusted monthly withdrawal of 50,000 for the next 25 years.   He needs 1.5 Crores for this.  If he is having a saving of just 1.5 Crore, he should invest it safely for his monthly expenses. I don’t suggest more than 10 -15% of this portfolio in equity. In this case, expect the portfolio return equal to the rate of inflation (zero real rate of return). I am assuming both at 6%.

He need not worry about this market crash. Why?

Let’s assume he has invested 85% of the portfolio in debt and 15% in equity mutual funds. He will be withdrawing 50,000 per month from this debt portfolio.  Every year, he can increase the monthly withdrawal by 6% to offset inflation. This 85%will be invested in Senior Citizens Savings Scheme, Prime Ministers Vaya Vandana Yojana, Post Office Monthly Income Scheme, RBI Floating Rate bonds, Debt Mutual funds and Fixed Deposits.  They are not impacted by this equity market volatility.   He will not be withdrawing anything from the 15% of the equity portfolio for the next 15 years.  During these 15 years, he will be gradually moving this equity also into debt. By age 75, he will be having a 100% debt portfolio.

Is there any reason for him to worry about this market crash now? No, because he is not going to withdraw from equity in the next 15 years. If the investment period is 15 years, I don’t see any reason why he should worry about this volatility. In the next 15 years, there will be many bad years, many excellent years and many average years. This will give him enough room to shift from equity to debt in a phased manner.

If he is having savings of 2.5 Crore at retirement, he can be aggressive with the excess 1 Crore as per his risk-taking ability. He is not going to consume this amount in his lifetime, and it is going to be for the benefit of his children.

If he is not having 1.5 Crore, he can take the risk of keeping around 20% of the portfolio in equity in the initial years, provided he is an experienced equity investor for many years and is comfortable with the volatility.

If he is not having any exposure in equity till age 60, I don’t suggest equity to him at age 60. He cannot digest the volatility with equity. This can make him panic when there is a market correction like this.

Middle aged investor aged 45

Let’s assume that he is having a child aged 15 and is in 10^th Class.  He needs big money for the higher education of the child in 2 years. The required amount for this goal should be in debt by this time. If he is keeping the required amount in equity now, he must worry about this market crash. Ideally, he should have rebalanced the portfolio for this goal gradually in the last 10 years and the amount should be in 100% debt 3 years before the goal. You cannot switch everything into debt exactly 3 years before the goal, it should be gradual.

He is planning to retire at age 55. This goal is 10 years away now.  He is having PF & PPF which is debt portion of the retirement portfolio. As per his risk profile, he is planning to keep 25% of the retirement portfolio in equity after age 55 and reduce it gradually.  He should plan to reach this ideal asset allocation in a phased manner in the next 10 years. He cannot do it altogether at 53 or 54, because market movement cannot be predicted.

If he is following this gradual rebalancing strategy, he need not worry about this market crash.

Young Investor aged 30

Let’s assume he is having a child aged 2 years. Higher education goal (graduation) is 15 years away. He can be aggressive with this goal if he understands equity volatility and is having the capacity to take risk.  He can start with a 60% equity portfolio and gradually reduce in the next 12 years. By the time child is aged 14, allocation to equity should be zero and the entire amount should be in debt. In this case, why he should be worried about the recent market crash?

He is planning early retirement at age 55.  This goal is 25 years away.  He is having compulsory PF contribution and is having a PPF where he invests 1.5 Lakhs per year. Other than this, entire monthly investment can be in equity to start with.  In the next 25 years, he can gradually reduce the exposure to equity through rebalancing.  But don’t wait till age 53 to shift to debt. This will backfire if there is a market crash like this closer to his retirement.

Gradual rebalancing from equity to debt will help you like a parachute for a safe landing. This is the essence of equity investing.

Who should worry about this market crash?

In the first example, if the senior citizen is keeping more than 30-35% of the retirement portfolio of 1.5 Crore in equity, he should worry.  If the bearish phase continues for couple of years, he will find it difficult to sustain the planned monthly withdrawal.

In the second example, if he is keeping the amount for higher education in equity, he will face problem. Chances for recovering this loss in the next 2 years is remote. He may think of education loan for the shortage.

In the 3^rd example of young investor, he need not worry even if he is bit higher on equity than he can digest. This is because, he is having time on his side to recover the loss.

Greed is the root cause of this issue

Equity can give decent return in the long term if you are a disciplined investor.  Investing in equity mutual funds regularly irrespective of the market level is the best option for a salaried person to create wealth in the long term.

Many investors started investing in direct stocks after the 2020 market correction. The period after this crash created many self-styled fund managers!  They are thinking that they can make higher return regularly if they invest in stocks!  If you think you can make higher return than mutual funds year after year, you are now in a wrong job!

Please note that stock selection is not an easy job. Everybody cannot master it along with their full-time job. Why not outsource this to an expert at a nominal fee? This is what mutual funds offer. I am a happy mutual fund investor for the last 22 years and is satisfied with the return from it.  I feel paying 1% annual fund management charge to an experienced fund manager is better than I directly investing in stocks!

If you maintain a well-diversified portfolio with both equity & debt as per your risk profile, risk taking ability and duration to the financial goals, there is no reason to worry about the market crash.  You can continue with your monthly investments without any worries. In such case, there is no need to check the fund value daily only to increase your blood pleasure during bearish phases like this.  An yearly review of funds and gradual rebalancing is the only job to do.