A Pattern Observed Over the Years
The Nifty Smallcap 100 index reveals an interesting pattern over the past 20 years. From 2004 to 2024, data shows that small-cap stocks typically experience a significant drawdown, or decline, almost every year. The average drawdown during this period is around 26%, with most years witnessing double-digit declines. In fact, only one year had a drawdown below 10%. This indicates that it is common to see a 10–30% dip in small-cap stocks annually.
Sharp Declines Don’t Always Indicate a Bad Year
While these declines may seem alarming, the final yearly returns tell a different story. In 15 out of 21 years, the index still achieved a positive return, even after experiencing mid-year falls. For instance, in some years when the market dropped by as much as 47%, it still ended the year in the green. This illustrates that significant losses during the year do not necessarily mean the year will end poorly. The index has shown resilience by bouncing back from its lows.
The Importance of Staying Invested
The key takeaway here is straightforward: those who remain invested for the long term often achieve success. If someone exits the market every time there is a dip of 10–15%, they risk missing the recovery and may face repeated losses. The small-cap sector is characterized by short-term pain but can yield long-term gains. Continuously jumping in and out based on fear or FOMO (fear of missing out) can severely hurt returns.
Understand What You’re Investing In
Understanding the nature of small-cap stocks is crucial. They tend to be more volatile than large-cap stocks, experiencing rapid increases and decreases. However, they also have the potential for substantial returns over time. Investors who approach the market with short-term expectations may find themselves disappointed. Conversely, those who recognize that short-term losses are part of the journey and stay focused on long-term goals are more likely to benefit.
The Overall Outlook is Positive
Despite the regular dips each year, the small-cap index has managed to generate wealth for long-term investors. The key is to avoid panicking during each dip and to refrain from making decisions based solely on fear. By cultivating a mindset focused on long-term growth, investors can significantly enhance their overall returns.
Have you ever sold a stock during a dip and later regretted your decision? Share your story in the comments below! If you found this blog helpful, don’t forget to SHARE it with your friends!
WeekendInvesting launches – The Momentum Podcast
This episode of THE MOMENTUM PODCAST features Manubhav, a third-generation real estate professional, sharing his unique journey navigating both worlds.
Discover:
✅ FROM PROPERTY TO PORTFOLIO: Manubhav’s transition from his family’s established real estate business to exploring equity investments.
✅ MARKET WISDOM: His candid experiences with market swings, including COVID-19’s impact on his SIPs, and lessons learned from F&O and smallcase.
✅ THE BIG COMPARISON: A fascinating look at real estate vs. equity returns, featuring real-world numbers from his family’s 40-year property investment.
✅ UNCOMMON INSIGHTS: Why gold is a family favorite and the surprising state of equity investing in smaller Indian towns.
