Volatility – In the markets or in our heads?

Volatility is a word that makes most investors shiver! But seasoned investors don’t see market volatility as an enemy; rather, they like volatility.

Investment volatility refers to the rate of change or fluctuations in the price of an asset over a period of time. Volatility is a function of various factors: economic outlook, interest rates, geopolitical situations, weather or calamity, war, terrorism, macro environment, supply and demand levels, micro level business performance and outlook, among others factors. However, many of these factors are not permanent and will usually disappear within months or years. Moreover, these macro and micro factors are hardly within the control of an investor.

How does a typical investor behave? When the markets are rising, investors tend to invest more and more money in the stock market. Seeing other people around you, more and more people are investing in stock markets or mutual funds. The higher the market goes, the more money is invested. When the market starts falling, people start exiting their investments and the resulting contagion effect lowers the value of the investment. This is what happened in March 2020 during the first confinement. Many investors exited their investments with larger losses, while others preferred to stay on the close until the markets recovered. However, few smart investors have taken the opportunity and invested their money to achieve multi-bagger returns. The data suggests that more dematerialized accounts and mutual fund folios were created much later, starting in mid-2021; they lost great upside potential due to volatility in their minds, not market volatility.

To clarify my point, take a look at the Sensex chart since 1991. The chart plots all major events for the past 31 years. You can see that all of the crises were bigger than the previous ones, and the resulting market drops during those times were also bigger. History has also proven that the market has created new highs after every major drop. The maximum recovery time the market took to create new highs was 6 to 36 months. This clearly shows that market volatility is temporary but growth is permanent.

Spotlight on ET

Equity investment is considered a speculative asset by investors; as such, they tend to like stocks rather than espouse them. For example, when investing in stocks or mutual funds, investors usually decide on the exit date or target price in mind. But do investors always keep a target price or exit date in mind when investing in real estate or gold? The answer is almost always negative. This is the main reason why you get better returns when investing in real estate and gold. Real estate and gold prices fluctuate, but you rarely check this as often as you would your stock investments. It’s simply because you haven’t set a target price or exit time when investing in these non-stock assets. So, is it so hard to marry a stock mutual fund?

Extensive research over the years has shown that stock indices have outperformed bonds, real estate and gold over various periods of 10+ years. While the performance of the indices beat that of bonds, insurance, real estate and gold, the mutual funds were able to beat even their respective indices over the same period, with an impressive track record of more than 25 years.

So when the markets are volatile, remember to have a stable long-term investor mindset and consider investing more during those times. Your investments will only increase over time.

Opinions are personal: the author, Bhavesh Damania is the founder of Wisdom Edge Investments

Warning: The opinions expressed are those of the author and are personal. TAML may or may not subscribe to the same. The opinions expressed in this article/video in no way attempt to predict or time the markets. The opinions expressed are for informational purposes only and do not constitute investment, legal or tax advice. Any action taken by you based on the information contained herein is your sole responsibility and Tata Asset Management will not be liable in any way for the consequences of any such action taken by you.

Investments in mutual funds are subject to market risk, read all plan documents carefully.

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