The recent rally in Indian equity markets also creates an inevitable uncomfortable question—“What if markets fall? Is there anything I should do?”
When we studied the past 40+ years of market history, Indian equity markets have had 10-20% temporary declines almost every year. It has also experienced steeper declines of 30-60% once every 7-10 years. Using history as a rough guide, here is how you can set the right expectations for your portfolio.
Normal expectation: Expect 10-20% temporary corrections every year; when you check your portfolio, assume 80% of your equity portfolio value and add that to your debt portion’s value. Mentally benchmark the value of your overall portfolio to this number. As long as your portfolio value is above this number, it is behaving exactly as it should. This is the normal expected behaviour from your portfolio. This way, you will be able to put the common yearly temporary declines into proper perspective and won’t be surprised by them.
Unusual expectation: Expect 30-60% temporary corrections once every 7-10 years. While these large corrections are not frequent, history shows that it’s reasonable to expect a large fall every 7-10 years. It is very difficult to predict ‘when’ these large falls happen and which 10-20% decline converts into the big one. So, when you check your portfolio, also assume 50% of your equity portfolio value and add that to your debt portion. You should be mentally prepared to temporarily accept this assumed total portfolio value in the event of a sudden market decline. While these large falls are not frequent, this must be a part of the expectation. If both the above assumptions seem too difficult for you to manage, it means your portfolio has much higher equity exposure than your ability to tolerate painful declines. You will need to revisit your original asset allocation (read as the split between equity and debt in your portfolio). Once you are sure that the allocation is in line with your ability to tolerate declines, here is the next step
