The J-Curve Effect in Markets
When can it be observed?
The J-curve is a trendline of an investment portfolio’s trajectory over a period of time where an initial loss is immediately followed by a dramatic gain to a level that exceeds the starting point.
You can see it in investments as they are always subject to price risk causing your returns to fluctuate over a period of time. The effect is such that a period of constant gains followed by a period of losses is noticed. As markets are highly volatile, minute price changes can affect your portfolio and cost you millions, but the same price changes during a bull run can make you a millionaire.
How does the J-curve work?
During the contractionary phase of the bear markets, your portfolio may underperform, but in this phase, if you decide to hold your investments and wait, the bull phase ahead will reflect a sizable growth in your portfolio. If you decide to follow the herd and sell-off you will miss on the gains coming your way ahead. During the period of transition, the investments turn attractive, it’s the best time to buy and invest and existing investors can hold their investments till the curve transitions upward and the value of the investments turn positive!
Let's see a few real instances where the J-Curve was observed
Booms and crashes are inherited in the nature of the stock markets. In 2008, the BSE saw the worst crash in history where it fell 1,408 points leading to one of the largest erosion of investor wealth. Following the J-curve, this was the largest bear phase seen by the markets which persisted for almost a year, after which the boom was seen in 2009, where the Sensex rose in a range between 20–30% and the bull phase was set in.
You can never predict the bottom of a J-curve, the fall in markets is always not evident as sentiments play a vital role then, but what you can predict is the upside. As the upward movement in markets is always visible and evident before the bull phase actually sets in as they are majorly guided through the market fundamentals and not the sentiments.
As you can see, patience over the J-curve playing out can lead to great outcomes for the long term investor, while impatience and untimely exit at the bottom can have a really negative effect on portfolios. This is where we usually hear the term ‘Lost a lot of money in the market’. Good luck and wish you happy ‘patient investing’!
