Why you should worry about the latest market crash

History tells us that we’ve lost money in earlier falls, the greed years of the dot-com boom, for instance, writes Gautam Chikermane.

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.

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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’.

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.