₹1 Lakh, One Crash, Three Very Different Outcomes

It’s a random Tuesday. You open your investment app out of habit, the way you check your phone for no reason. Red. Down 15% from where it was a few weeks ago.

Your stomach does the thing it does. And a very reasonable-sounding voice in your head says: just move to cash. Stop the bleeding. Come back in when things calm down.

It sounds responsible. Careful, even. It is, in fact, one of the most expensive decisions you can make with your money, and almost nobody realises it in the moment.

Here’s why.

Cash Isn’t Safe. It Just Looks Safe.

When your portfolio is down 10-20%, cash starts to feel like the adult choice. No more red numbers. Nothing left to lose. That’s the pitch cash makes to a nervous investor, and it’s mostly an illusion.

A 15% fall, on its own, tells you nothing about what happens next. Historically, drops like this have been followed by recoveries far more often than by further collapse. So when you move to cash, you’re not protecting your money. You’re locking in the fall and handing yourself a second, harder decision: when do I get back in?

That second decision is brutal, because there’s no bell that rings when the recovery starts. By the time it’s obvious markets have turned, the best part of the recovery has usually already happened without you.

This is the trap: you exit to dodge a loss you haven’t actually taken yet, and in doing so, you turn a paper cut, something that costs you nothing if you just leave it alone, into a real wound you now have to heal from scratch.

The Difference Between “Down” and “Lost” and Why the Math Hates You for Selling

There are two very different things happening when markets fall, and most people mix them up.

A drawdown is just a number. It tells you how far your portfolio has slipped from its peak. Down 20%? That’s a 20% drawdown. If you don’t sell, it’s not a loss; it’s a temperature reading. It moves with the market and disappears the moment your portfolio hits a new high.

A realised loss is different. It’s what happens the second you sell. The drawdown becomes permanent. There’s no next month, no next cycle in which that money can recover because it’s no longer in the thing that was going to do the recovering.

And here’s the part that catches people off guard: the deeper the fall, the more brutally unfair the math gets.

Take the Value & Momentum Model smallcase during COVID. Between 14th January 2020 and 23rd March 2020, it fell 40.6% from 92.73 to 55.12. Sounds like it needs a 40.6% gain to get back to even, right? No. It needed a 68.2% gain.

Why the gap? Because the fall and the recovery are measured on different bases. The loss is calculated on the bigger, original number. The recovery has to be calculated on the smaller number you’re left with. Think of ₹100 falling 50% to ₹50; a 50% gain from there only gets you to ₹75, not back to ₹100, because that 50% is now being calculated on half the money.

The investor who did nothing got that 68.2% recovery for free. The strategy was back above its pre-crash level by mid-July 2020, less than four months later. The investor who sold near the bottom locked in the 40.6% loss, and then had to go find that 68.2% gain somewhere else, usually by buying back in later, at a higher price, after most of the recovery had already run.

Same story, smaller scale, during the Russia-Ukraine crisis: an 18% fall between February and June 2022 needed a 22% gain to undo. Smaller numbers, identical trap.

Why the Fall Feels Endless (Even When It Isn’t)

None of this would matter much if we experienced bad markets accurately. We don’t because of something called recency bias.

Recency bias is your brain’s habit of treating whatever just happened as the new permanent reality, instead of one phase in a cycle it’s been through many times before. In a falling market, this shows up in a very specific way: the fall feels permanent while it’s happening, and the recovery feels temporary once it starts.

Three months into a drawdown, it genuinely feels like the market has always been falling because three months is what you can actually feel, in your gut, checking the app. A five-year track record showing this has happened before, multiple times, and recovered every time? That data doesn’t stand a chance against today’s number on your screen.

This is what actually costs people money: someone who correctly thought of themselves as a long-term investor in January quietly turns into a next-month investor by March, once the fall is three months old and feels like it’ll never end. Nothing about their goals changed. Their patience just got hijacked by how the last few weeks felt.

(It works the other way too: six months into a rally, it starts to feel unstoppable right when it should be getting more scrutiny, not less.)

Same Strategy, Same Crash, Three Very Different Outcomes

To make this real, picture three people. Each puts money into the exact same Value & Momentum Model smallcase on 1st January 2022, right before the Russia-Ukraine crisis hits, and we follow all three through to 1st January 2026.

Investor 1: the panic seller. Puts in ₹1,00,000 at an index level of 248.71. Watches it fall to 192.33 by June 2022; a 22.7% drawdown that feels unrelenting. Sells. Stays out, scarred, for good. That ₹77,331 he walked away with in June 2022 just… sits there. Meanwhile, the strategy itself nearly doubles by 2026.

Investor 2: the one who just didn’t touch it. Same ₹1,00,000, same day, same fall, same discomfort. She doesn’t sell. She also doesn’t add more when the rally comes, because it still feels uncertain to her; she just leaves the original amount in and lets it ride. One decision, made once, at the start. By January 2026, that ₹1,00,000 is worth ₹2,02,581, a 2.03x return.

Investor 3: the one who kept showing up. No lump sum. Just ₹10,000 every single month through the crash, through the recovery, through every headline in between for 49 months. She puts in ₹4,90,000 total. By January 2026, it’s worth ₹7,43,975, a 1.52x return on money invested.

Quick note on why the SIP investor has a lower multiple (1.52x) but a higher XIRR (21.6%) than the lump-sum investor (2.03x, 19.3%): XIRR accounts for when the money went in. Most of her SIP instalments hadn’t even been invested for the full four years; new money kept joining late and still had time to work. That’s why XIRR, not the raw multiple, is the fairer way to compare a SIP against a lump sum.

Same strategy. Same market. Same crash. The only variable was what each person did on the one day the fall felt unbearable, and cash felt safe.

So What Do You Actually Do With This?

This isn’t a case for blind faith. If a strategy stops meeting its own criteria, that’s a real reason to exit, and it’s handled through the strategy’s own process, not through panic. The point is telling apart two things that feel identical but aren’t: a strategy that’s actually broken versus a market that’s fallen and feels uncomfortable. Only one of those is a signal. The other is just a feeling.

A few things worth remembering next time your portfolio is red:

• A drawdown is not a decision point. It’s just a data point. Let the strategy’s rules decide when something’s actually wrong, not how the last three weeks have felt.
• The math rewards staying put, and rewards it more the scarier the fall gets. A 40% fall needs a 68% gain to undo. A 20% fall needs 25%. Stay in, and that gain shows up on its own. Sell, and you’re rebuilding it yourself, from further behind.
• Every bear market in history has eventually turned into a bull market. That’s not a guarantee about the next one, but it’s a far better guide than three weeks of falling prices.
• Showing up regardless of sentiment beats trying to time it, not because it’s clever, but because it removes the one call almost nobody gets right under pressure: exactly when to jump back in.

The market’s never going to ask how you’re feeling before it falls, and it’s not going to wait until you feel ready before it recovers. It was built to be ridden through full cycles, including the parts that don’t feel good. Your only job is to stay on it.

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