Classroom: When equity markets slide, what should retail investors do?

One of the basic principles of equity investing is to 'stay invested for the long term.' You have probably heard and read that enough in the past. But when stock markets start to slide, like they did last week, one often questions that principle.

Of course, if you are a trader with open positions, you would need to act in such a scenario. But for small retail investors with a long-term horizon, who hold good quality stocks and funds, there is usually little to worry. That's because equities do give the best results in the long-term. In the short term, the prices of equity shares are driven by traders and speculators who are looking at short term gains. They bet on scrips on the basis of tips and information which may or may not happen. However, over a long period of time, the short term volatilities get evened out and the returns reflect growth that is more realistic.
The crucial point here is 'long-term' and let us take this opportunity to explore what 'long-term' really is.

Let us dip into some empirical research. Refer to the table. Column (2) gives you the value of the Sensex as on the date mentioned in column (1). So as of 31 March 1980, the Sensex level was 129. Column (3) tells you the annual return for each year. So if you had invested on 31 March 1980 and had sold your shares on 31 March 1981, you would have made a return of 34.9%. Column (4) tells you the annualized return on your investment, had you stayed invested for a 3 year period. So if you had invested on 31 March 1980 and sold your shares on 31 March 1983, you would have made an annualised return of 18.1% per annum. The same applies in case of columns 5 to 9. So suppose you had invested on 31 March 1980 and stayed invested for 20 years, you would have made 20.09% per annum.

Now let us come down to the last two rows of the table. The probability of loss shows your chances of losing money for each holding period. So if you had stayed invested in the Sensex for any one year during the years 1979 to 2011, you would have lost money in 11 out of the 32 years. If you had stayed invested for any 3 year during that period, you would have lost money 6 out of 30 times.
The average return row shows you the average return for that holding period. So if you had stayed invested for any one year during that period, you would have made an average return of 26.64% per annum. But of cou