Many people believe that investing in an index is a safe and foolproof way to grow wealth. While index investing has many benefits, it is not without its risks. This chart shared by Zafar Shaik highlights how market cycles can lead to long periods of stagnation. For example, during the Harshad Mehta rally of 1988 to 1992, the market surged nearly five times in just four years. If a similar rally happened today, Nifty would jump from its current level to over 25,000 in a very short time. However, after such rapid growth, the market needs time to adjust, and corrections can take years or even decades.

Long Periods of No Growth

The data shows that after the sharp rise in the early 90s, the market moved sideways for almost 13 years, stuck in a range between 60 and 130 in dollar terms. Even after that, another correction followed, making it a 17-year wait before the market finally started moving again. This pattern shows that even in a growing market, investors may experience long stretches where their portfolios see little to no growth. Many people invest in the market thinking that they will see consistent returns every year, but history suggests otherwise. If markets move too fast in one phase, they often slow down later to compensate.

The Impact of Currency Depreciation

One common mistake investors make is celebrating returns in local currency terms without considering the impact of currency depreciation. While a 20% return in rupees over four years may seem good, if the currency itself depreciates by 3-4% annually, the real return is much lower when measured in global terms. This is why global investors always measure returns in dollar terms, and long-term rupee depreciation must be factored in while evaluating market growth.

Expectation Management in Investing

Investors often enter the market with unrealistic expectations. If they have seen markets grow at 20% annually for a few years, they start believing that this will continue forever. But markets follow a long-term trajectory, and they go through cycles of high returns followed by stagnation. The key is to have a realistic expectation of returns, somewhere in the range of 9-12% over a long period. If an investor is expecting 20-30% consistently, they are likely to be disappointed when markets slow down.

Index Investing Is Not Risk-Free

Many investors think that buying an index fund eliminates risk, but this is not true. If someone invests at the wrong time, such as after a major rally, they may have to wait for years before seeing meaningful returns. Additionally, indexes themselves go through changes over time. Poor-performing stocks are removed, and new, promising stocks are added. For example, stocks like Zomato have recently been added to the Nifty. This means that indexes also act as momentum portfolios, and their returns depend on which stocks are part of the index at a given time.

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