A runner’s mind mostly runs in one direction, i.e. better timing than the last race. Be it a 5km / 10km / Half or full marathon, the term called as “Personal Best” (PB). The burning desire to beat one’s own timing gives a runner’s high.
I did my first Half marathon in 2hrs 45 mins . And in the year 2020 , clocked a PB of 1hr 49 mins. Over the years I too got inclined towards a PB mindset.
The journey to strive and push your own limits is marred with temporary drawdowns in form of injuries, visits to physiotherapy sessions, missing family get togethers, amongst others.
Drawdowns form an integral and indispensable part of runner’s journey towards bettering one’s own performance. The extent of drawdown may vary from missing an event to a DNF or not being able to improve upon one’s timing.
How can a runner deal with drawdowns?
The answer is simple – work on your weakness and accept drawdowns as part of journey and be prepared to face them.
Now, what does this have to do with Investing?
Over a multiyear time horizon, equity markets tend to deliver positive growth, however it has its own version of temporary drawdowns.
The accompanying chart displays the largest fall recorded during each year for the Sensex, i.e. the fall from the highest index value to the lowest index value in a year for the period 1996 to 2021.
Source: BSE India
As seen from the red bars, equity markets witnessed a temporary drawdown each and every year, ranging from 20% to about 64%. You read it right. There was not a single year where the markets did not have a temporary drawdown.
Similar to the runner, most of us have this tendency to work on the right timing at our portfolios (trying to time the markets by moving out and in) at the first signs of red in our equity portfolios.
Last 25 years data simply lets us know that a temporary drawdown is almost a given every year.
Inevitably, there is always some new noise or development leading to these temporary drawdowns each and every year. While every volatile session looks like start of a large market correction, more often than not, it’s just the usual 10-20% temporary drawdown.
Using above data points as a framework, one may say that once every 7-10 years, equity markets have witnessed sharp temporary drawdowns of 30-60%.
While the historical pattern may or may not repeat, this is a reasonable expectation to have and keep check on our investing emotions.
How to deal with drawdowns?
A 10-20% temporary drawdown may be considered as normal equity market volatility and requires no major action. However, if there is a larger drawdown than it is better to be prepared with a framework to take advantage of the volatility without panicking.
Each individual has to define on his/her ability to bear volatility keeping in mind investing time frame beforehand.
One can have separate bucket say Debt (D) to be deployed into Equities (E) if:
- E corrects by 20%, Move ~20% from D in E
- E corrects by 30%, Move ~20% from D in E
- E corrects by more than ~50%, move remaining portion of D to E
While there is no right or wrong approach, the key is to have a framework in place and keep it as a guiding principle to take advantage of these temporary drawdowns and convert it into opportunities.
Content – Ajeeth Kaushal