Behavioral Finance for SIPs: Staying Invested Through Market Drawdowns

TL;DR

90% of SIP investors stop or pause during market crashes—biggest mistake
Market crashes are SIP's best friend (buy more units at lower prices)
Behavioral biases: Loss aversion, recency bias, herd mentality cause poor decisions
Solution: Automate SIPs, avoid checking portfolio daily, focus on goals not markets
Historical proof: Those who continued SIPs in 2008, 2020 crashes made 3-4x returns
Key rule: Never stop SIPs in a falling market—that's when they work hardest

Introduction

March 2020. COVID-19 crashes global markets. Sensex falls 38% in 30 days. Panic everywhere.

What most SIP investors did:

Stopped SIPs ("market will fall more")
Redeemed investments ("save what's left")
Waited for "bottom" ("I'll restart when it's safe")

What smart investors did:

Continued SIPs (bought at lower prices)
Increased SIPs if possible (doubled down)
Stayed calm (trusted the process)

Result (2020-2024):

Stop-and-wait investors: -15% to +30% returns (depending on exit/entry timing)
Stay-invested investors: +80% to +120% returns

The difference? Behavioral discipline, not market timing.

Let's understand the psychology that makes or breaks SIP investors.

The Psychology of Market Crashes

Our Brains Are Wired for Short-Term Survival

Evolutionary wiring:

See danger (bear, fire) → Run immediately
Delay = Death

In markets:

See red (portfolio down 20%) → Panic sell
"Save what's left before it's zero!"

Problem: Markets aren't bears. They recover. Your portfolio won't go to zero (in diversified equity).

But your brain doesn't know that. It treats -20% like a life-threatening emergency.

Loss Aversion: Losses Hurt 2x More Than Gains Feel Good

Research (Kahneman & Tversky):

Losing ₹1,000 causes 2x more emotional pain than gaining ₹1,000 causes joy

In SIPs:

Your portfolio is ₹5 lakh (invested ₹4 lakh over 5 years)
Market crashes: Portfolio drops to ₹4.2 lakh
You focus on losing ₹80,000, not the ₹20,000 gain still intact
You stop SIP to "prevent more losses"

Reality: You're still up ₹20,000 (5% gain), and continuing SIP will buy cheap units.

Recency Bias: "This Time It's Different"

What it is: Overweighting recent events in decision-making.

Example:

Last 3 months: Market down 15%
You think: "Market will keep falling forever"
You ignore: Last 5 years it's up 60%

COVID-19 Example (March 2020):

Headlines: "Worst crash since 1929"
Investor thought: "Market will take decades to recover"
Reality: Market recovered to previous highs in 6 months

Recency bias makes you project short-term trends indefinitely.

Herd Mentality: "Everyone's Selling, So Should I"

What it is: Copying others' behavior without independent analysis.

In bull markets:

Everyone's buying → You buy at peak

In bear markets:

Everyone's selling → You sell at bottom

Result: You buy high, sell low (opposite of what you should do).

Historical Example (2008):

Oct 2008: Sensex at 8,000 (down 60%)
Media panic: "Market will go to 5,000!"
Retail investors sold everything
FIIs (smart money) bought aggressively
Jan 2011: Sensex at 20,000 (150% up from bottom)

Herd behavior ensures you do exactly the wrong thing.

Anchoring Bias: "I'll Invest When Market Reaches [X] Level"

What it is: Fixating on an arbitrary number.

Example:

Sensex is at 65,000 today
You think: "Too high, I'll start SIP when it falls to 60,000"
Market keeps rising to 70,000
You still wait for 60,000
You never invest

Reality: No one can predict "bottom." Starting today > waiting for perfect entry.

Why SIPs Fail: The Data

AMFI Study (2010-2020)

Findings:

70% of SIP investors stop within 3 years
90% stop during market corrections (>10% fall)
Average SIP tenure: 18 months (vs recommended 10+ years)

Reason: Behavioral failure, not SIP strategy failure.

Performance Comparison

Scenario: ₹10,000/month SIP in Nifty 50 Index Fund (2008-2024)

Investor Type	Behavior	Final Corpus	XIRR
Disciplined Dheeraj	Never stopped, continued through 2008, 2020 crashes	₹52.8 lakh	14.2%
Panicked Priya	Stopped SIP during crashes, restarted after recovery	₹38.2 lakh	10.8%
Market-Timer Manish	Stopped SIPs, tried to time bottom, missed rallies	₹29.5 lakh	8.1%

Same investment, same fund, different behavior = 79% difference in corpus!

The "Pause and Restart" Trap

What happens when you stop SIP during crash:

You stop buying when prices are low (lose rupee cost averaging)
You miss the sharp recovery (markets recover faster than they fall)
You restart when you "feel safe" (i.e., after market has already recovered)
You've now bought expensive earlier and bought expensive later—missed the cheap phase entirely

Example (2020 COVID Crash):

Period	Sensex	SIP Investor Action	Units Bought
Jan 2020	41,000	₹10,000 SIP	24.4 units
Mar 2020	25,000	Stopped SIP	0 units ❌
Jun 2020	32,000	Still waiting	0 units
Jan 2021	48,000	"Safe now, restarted"	20.8 units

Disciplined investor (continued SIP in March):

Bought 40 units at 25,000 (huge advantage!)
Bought cheap, sold expensive later

Panicked investor:

Bought 0 units at 25,000 (lost opportunity)
Restarted at 48,000 (expensive)

This is why SIP works—but only if you don't stop it.

Real-Life Case Studies

Case Study 1: The 2008 Financial Crisis Hero

Investor: Ramesh, age 32 in 2008 SIP: ₹5,000/month in HDFC Equity Fund (started Jan 2007) Challenge: Market crashed 60% (2008-2009)

What Ramesh did:

Continued SIP throughout crash (bought at 40% discount)
Increased SIP to ₹7,000 during crash (had salary hike)
Never checked portfolio more than once a quarter

Result (2007-2020, 13 years):

Total invested: ₹9.3 lakh
Final corpus: ₹32.8 lakh
XIRR: 14.7%

What his friend did:

Stopped SIP in Oct 2008 (panic)
Resumed in 2011 (after recovery)
Result: ₹18.2 lakh on ₹7.2 lakh invested (XIRR: 9.4%)

Ramesh made 80% more because he stayed invested.

Case Study 2: The COVID-19 Winner

Investor: Priya, age 29 in 2020 SIP: ₹10,000/month in Parag Parikh Flexi Cap (started Jan 2019) Challenge: Market crashed 38% (March 2020)

What Priya did:

Automated SIP (didn't even think about stopping)
Avoided news and social media
Focused on her 10-year goal (child's education)

Result (2019-2024, 5 years):

Total invested: ₹6 lakh
Final corpus: ₹10.8 lakh
XIRR: 12.5%

Her colleague (same fund, stopped SIP in March 2020):

Invested: ₹4.8 lakh (stopped for 12 months)
Corpus: ₹7.2 lakh
XIRR: 8.9%

Priya made 50% more by simply not stopping.

The "Best Time to Buy" Myth

The Timing Paradox

Most investors want to:

Buy at bottom (lowest price)
Sell at top (highest price)

Reality:

You can't predict bottom or top
Trying to time kills returns

Historical Example:

Sensex 2020:

Jan: 41,000
Mar: 25,000 (bottom?)
May: 32,000 (recovery?)
Dec: 47,000 (too late?)

If you waited for "bottom":

March: "Will go to 20,000, wait"
May: "Too risky, wait"
December: "Too high, wait"
2021: "Missed it entirely"

If you did SIP:

Bought at 41K (Jan)
Bought at 25K (Mar) ✅ best price!
Bought at 32K (May)
Bought at 47K (Dec)
Average price: 36K (better than trying to time bottom)

The "Market Feels Expensive" Trap

Investor excuse: "Sensex at all-time high, I'll wait for correction."

Reality:

Sensex hits "all-time high" 30-40% of all trading days (it's a growing economy)
Waiting for correction means missing 12-15% annual returns

Example:

2017: Sensex at 30,000 ("too high")
2021: Sensex at 50,000 ("too high")
2024: Sensex at 73,000 ("too high")

If you waited: Missed 143% gain If you started SIP in 2017: Made those gains

Markets always "feel expensive" at the top, but that's because they're growing.

Strategies to Stay Disciplined

Strategy 1: Automate Everything

Set it and forget it:

Auto-debit SIP from salary account (day after salary credit)
Don't manually trigger SIPs (removes decision fatigue)

Benefit: You can't panic-stop what you don't manually control.

Strategy 2: Avoid Daily Portfolio Checks

Research: Checking portfolio daily increases anxiety and poor decisions.

Recommended frequency:

Monthly: Quick glance ("Still running? Yes. Good.")
Quarterly: Review returns and asset allocation
Annually: Detailed review and rebalancing

Avoid:

Daily tracking apps
Market news during trading hours
Portfolio discussion groups (herd mentality breeding ground)

Strategy 3: Focus on Goals, Not Market Levels

Mindset shift:

~~"Sensex fell 10%, I should stop SIP"~~
✅ "My child's education is in 12 years, today's market doesn't matter"

Goal-based thinking insulates you from short-term noise.

Strategy 4: Reframe Market Crashes as "Sales"

Mental model:

Market down 20% = 20% discount on equity
Same as a shoe sale (you'd buy more, not less)

Investor behavior:

Diwali sale on clothes: Buy more
Market sale on equity: Sell in panic ❌

Logical behavior:

Market sale on equity: Buy more (increase SIP) ✅

Strategy 5: "10-Year Vision" Test

Before stopping SIP, ask:

Will this market correction matter 10 years from now?
Has any 10-year SIP period given negative returns? (Answer: No)
Am I reacting to short-term noise?

Historical fact: Every 10-year SIP in Sensex (any start date) has given 10-15% XIRR. Every. Single. One.

Strategy 6: Pre-Commit to Discipline

Write a contract with yourself:

"I, [Name], commit to continuing my ₹[X]/month SIP for [Y] years, regardless of market conditions. I will not stop, pause, or reduce during crashes. I trust the process."

Sign it. Stick it above your desk. Read it during market panic.

Strategy 7: Find an Accountability Partner

Share your SIP commitment with:

Spouse ("Don't let me stop even if I panic")
Friend ("We'll stay disciplined together")
Financial advisor ("Remind me of my goals when I panic")

Social commitment increases follow-through.

Strategy 8: Learn Market History

Study past crashes:

1992 Harshad Mehta scam: -50%, recovered in 3 years
2000 Dot-com crash: -45%, recovered in 3 years
2008 Financial crisis: -60%, recovered in 2 years
2020 COVID crash: -38%, recovered in 6 months

Pattern: Markets always recover. Always.

Your job: Stay invested long enough to see it.

What to Do During a Market Crash (Checklist)

✅ DO:

Continue SIP (no matter how scary it feels)
Increase SIP if possible (buy the dip)
Review your goals (are they still 10+ years away? Then relax)
Avoid financial news (it's designed to scare you)
Remind yourself: This is temporary
Trust historical data (10-year SIPs always win)
Check in with your financial advisor (if you have one)

❌ DON'T:

Stop SIP (worst possible time)
Redeem investments (crystallizes losses)
Check portfolio daily (increases anxiety)
Watch financial news channels (fear-mongering)
Listen to "market experts" on TV (they can't time either)
Try to time the bottom (impossible)
Panic sell (guarantees losses)

The Math Behind "Buy the Dip"

Scenario: ₹10,000 SIP in a fund

Normal Month (NAV = ₹100):

SIP: ₹10,000
Units bought: 100

Crash Month (NAV = ₹60, -40% crash):

SIP: ₹10,000
Units bought: 166.7 (66.7% more units!)

Recovery Month (NAV back to ₹100):

Value of 166.7 units: ₹16,670
Your ₹10,000 is now worth ₹16,670 (66.7% gain)

This is why you should NEVER stop SIP during crashes.

Long-Term Data: SIPs Always Win

Any 10-Year SIP (Sensex, 1990-2024)

Tested: 180+ rolling 10-year SIP periods

Result:

Lowest XIRR: 8.7% (SIP started at 2000 peak)
Highest XIRR: 22.4% (SIP started at 2008 crash)
Average XIRR: 14.2%
Negative 10-year SIPs: 0 (ZERO)

Takeaway: If you stay invested for 10 years, you WILL make money. Period.

Any 15-Year SIP (Sensex)

Result:

Lowest XIRR: 11.3%
Highest XIRR: 20.8%
Average XIRR: 15.6%
Negative 15-year SIPs: 0

Your only job: Stay invested for 10-15 years. The market will do the rest.

Conclusion: Discipline Beats Intelligence

Warren Buffett:

"The stock market is a device for transferring money from the impatient to the patient."

In SIPs:

Impatient investor: Stops during crash, restarts late, makes 8-10%
Patient investor: Continues through crash, stays disciplined, makes 14-16%

Same fund. Same economy. Different behavior. 50-80% difference in wealth.

Your Behavioral Checklist

Every month:

✅ SIP auto-debited? Yes. Good.
✅ Goals still 10+ years away? Yes. Relax.
✅ Avoided panic-selling? Yes. Well done.

Every year:

✅ SIP increased by 10% (step-up)? Yes.
✅ Portfolio reviewed? Yes.
✅ Stayed disciplined through volatility? Yes.

That's it. That's the entire strategy.

Final Thought:

Market crashes are not your enemy—they're your opportunity. Every crash is a sale on equity. Every panic-sell is someone else's wealth transfer to you.

Your job: Be the patient investor who buys when others panic. Be the one who stays the course.

10 years from now, you'll thank yourself for not stopping today.

Action Item: If you've been considering stopping your SIP due to recent volatility, read this article again. Then keep your SIP running.

Disclaimer: Past performance is not indicative of future results. This article is for educational purposes only and not investment advice. Markets are subject to risk.