Why Markets Fall, and Why That's the Price of Admission

Every few months, markets fall hard enough to make the news. Headlines search for a reason: interest rates, elections, oil, a global crisis. Usually there are several reasons, and usually none of them changes what a long-term investor should do.

What moves prices

A share price is what buyers and sellers agree a company's future profits are worth today. Two things move it: expectations about those profits, and the rate at which investors discount them.

When interest rates rise, future profits are worth less today, so prices fall even if companies are doing fine. When growth fears rise, expected profits shrink. When fear itself rises, investors demand a bigger reward for holding risky assets, and prices fall until they get it.

How often it happens

Indian equity markets see a fall of 10% or more from a peak in most years, and 20% or more every few years. The Sensex fell about 60% in 2008–09 and nearly 40% in early 2020. Both times, it recovered to new highs, in 2020 within months.

What to do

Check three things: that your emergency fund means you won't need to sell, that your SIPs are still running, and whether your allocation has drifted far enough to rebalance. Then close the app.

↗Try the sip calculatorWhat a monthly SIP could grow into.

What not to do

Don't sell to “wait until things settle”. Markets usually settle upward before investors feel safe. Don't borrow to buy the dip. And don't let one commentator's confident forecast replace your own written plan.

Source: BSE — Sensex Historical Data