History has a habit of throwing curveballs—unexpected events that shake the world and financial markets alike. From wars and political turmoil to economic crises and global pandemics, it seems there's always a reason not to invest. Yet, one reason consistently stands strong against the myriad of challenges: Compounding, especially when it comes to beating inflation.
When you take a closer look at the timeline of major world events over the past few decades, it's easy to see how fear and uncertainty have often discouraged even the most seasoned investors. However, for those who chose to stay the course, the power of compounding became their greatest ally.
Over the decades, numerous crises could have easily deterred investors. The Gulf War (1990-1991) and the assassination of Rajiv Gandhi in 1991 led to global and domestic instability. Scandals like the Harshad Mehta Scam (1992) and the Bombay bombings (1993) rattled investor confidence.
Financial Crises That Shaped the Market
Major financial collapses such as Barings Bank (1995), the LTCM crisis (1998), and Lehman Brothers (2008) shook the markets, triggering the global financial crisis. Further challenges included the European debt crisis (2010-2012), QE tapering concerns (2013), and the IL&FS default (2018).
Wars and Political Instability
Political uncertainty impacted markets, from the fall of the Vajpayee government (1999) to PM Gujral's resignation (1997). Wars and terror attacks, such as 9/11 (2001), the Iraq invasion (2003), London subway bombing (2005), and the 26/11 attacks in Mumbai (2008), also played a role in unsettling investor sentiment.
Pandemics and Natural Disasters
Natural events like the COVID-19 pandemic in 2020 and its second wave in 2021 created unprecedented economic challenges. Nations went into lockdown, businesses shut down, and uncertainty became the global norm.
Despite all these events—ranging from war to fraud, political instability, terror attacks, financial crises, and pandemics—there has been one constant that remained unaffected: the power of compounding.
Compounding works best over long periods of time, where each small gain is reinvested and allowed to grow further. It transforms a steady rate of return into exponential growth, and it's one of the most powerful tools for wealth creation. The journey of investing is rarely a smooth one, but it is precisely during times of crisis that compounding proves its worth.
During times of crisis, it's easy to make emotional decisions. Fear of losing hard-earned money can prompt investors to pull out, leading to missed opportunities for growth. Take, for example, the global financial crisis of 2008 or the COVID-19 pandemic in 2020. Investors who panicked and exited the market missed out on the subsequent recovery and gains that followed. The lesson here is clear: staying invested is crucial.
The beauty of compounding lies in its ability to grow wealth, even through the ups and downs of the market. When you invest for the long term, each year of growth builds upon the gains of the previous year. In this way, compounding serves as a powerful counterbalance to the market volatility caused by crises.
Over the years, many asset classes have gained popularity—from real estate to gold and fixed deposits. However, equity remains the preferred choice for investors looking for higher returns and wealth creation over time. Unlike other asset classes, equity offers inflation-adjusted returns, which is critical in preserving and growing wealth.
While there are risks associated with equity, the average returns of 12-15% significantly outpace the returns on other asset classes, such as real estate, which often hovers around 6-8%. When inflation is taken into account, these returns become even more compelling. The real value of wealth grows only when returns exceed inflation, and equity is the asset class that has consistently delivered inflation-beating returns over the long term.
It’s important to remember that equity markets are inherently volatile. This volatility is what makes equity a challenging investment during the short term. However, with patience and consistency, the reward for staying invested becomes evident as compounding takes effect, and long-term returns outpace inflation.
The long list of crises and market downturns may seem daunting. It is true that market corrections are painful, and it’s natural to feel concerned about your investments during such times. However, those who have reaped the rewards of long-term investing understand that patience is key.
Equity markets have rewarded patient investors who stay invested for the long term. Compounding works its magic only when allowed the time it needs, and staying invested—even in the face of crises—ensures that you don’t miss out on the inevitable recoveries that follow every downturn.
If we’ve learned anything from the past three decades, it’s that there will always be reasons not to invest. Wars, scandals, political turmoil, financial crises, pandemics—each has tested the resolve of investors. But there has always been one compelling reason to stay invested: the incredible power of compounding.
In the end, the real question isn’t whether crises will happen—they always will. The question is whether you’re ready to leverage the power of compounding to grow your wealth through these uncertain times. Equity, with its potential to deliver inflation-adjusted returns, is the most preferred asset class for long-term wealth creation.
Invest wisely, stay patient, and let compounding do its work. After all, compounding is the one reason strong enough to outweigh all the reasons not to invest.
