Befriend market volatility when investing for long term
Feb 16, 2023, 16:36 IST
When you hear or read about creating sustainable wealth, what is the first aspect that you think of? It is the stock market. But the unnerving aspect of the equity market is the volatility that comes along with it. While investing in equities will help create wealth in a slow and steady manner over the long term, it is equally true that a part or all of the gains could disappear within a matter of a few days. For example: When the pandemic struck in early 2020, there was widespread panic and the markets corrected by nearly 40% within a gap of nearly three months. Such instances hold the potential to wipe out all the gains from a portfolio, leading to a scarred investment experience.
Volatility: Name of the game
Every investor, however savvy or well-read he/she may be, experiences market volatility because, as with life, so with equities, change is the only constant. In fact, it is generally believed that market volatility is one of the biggest factors that deter investors from investing in equities. However, if you look back at what history indicates, even as the markets have witnessed several ups and downs over the past three decades, they have delivered good returns. Investors who have stayed invested, despite these fluctuations, have benefitted. For instance, the Nifty traversed a spectacular journey, from 1,107 points in 1996 to touching the 15000-mark in 2021, growing 14X in 25 years.
While these figures are impressive, investors should realise that in this period, the market has seen various historic events like the global financial crisis of 2008, wherein the markets corrected by 52% in a single year. Similarly, in 2011, the market was down 25%. In effect, the journey and the investment experience will not be a linear one. While volatility is the norm, what an investor should work towards is utilising market volatility to one’s advantage.
Optimally navigating volatility
While there is no doubt that mutual funds will get impacted during a broad based market correction, the damage inflicted tends to be limited as compared to the benchmark index. As an investor dealing with volatility while in pursuit of high returns and sustainable portfolio growth, it is in your best interest to make uncertainty your friend. This can be done by focusing on accumulating units of mutual funds in the down phase of markets, rather than getting swayed by negative sentiment and stopping your investments. Not only does this enable you to grow your portfolio, but it also helps you benefit from the concept of rupee cost averaging. In the rupee cost averaging approach, while you invest a fixed sum at regular intervals irrespective of the market levels, this ensures that one gets to buy more units when the markets are low and lesser units when they are high. As a result, one gets to average down the cost per unit over the long-term. After the sideways movement or downturn, when the trend reverses, you would have accumulated a larger holding in the mutual fund, translating into higher returns over the longer term.
Focus on the Long-Term
For investors keen on creating and sustaining wealth, the market is the perfect companion for a long-term commitment – the longer you hold on, the better your returns could be, thanks to both rupee cost averaging and compounding effect. Further, focusing on the long-term also allows you to sit back and relax while the market works its magic.
Creating long term wealth is not for the weak-willed – you need to be able to look at your portfolio with rose-tinted glasses and also ignore market volatility, if you want to stick it out till the end. And the best way to ensure this is to go with a systematic investment plan which ensures that you remain committed for the long run, while paying no heed to the short-term volatilities in the market.
To conclude, when investing for the long-term, remember the goal attached with the investment. Use the Systematic Investment Plan (SIP) route to invest in a consistent manner across market cycles in a cost effective manner. Redeem only when the goal is on horizon. Do not make the mistake of stopping or pausing SIP just because the markets are volatile.
Disclaimer : This article is authored by P Someswara Rao, Mutual Fund Distributor. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.
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Volatility: Name of the game
Every investor, however savvy or well-read he/she may be, experiences market volatility because, as with life, so with equities, change is the only constant. In fact, it is generally believed that market volatility is one of the biggest factors that deter investors from investing in equities. However, if you look back at what history indicates, even as the markets have witnessed several ups and downs over the past three decades, they have delivered good returns. Investors who have stayed invested, despite these fluctuations, have benefitted. For instance, the Nifty traversed a spectacular journey, from 1,107 points in 1996 to touching the 15000-mark in 2021, growing 14X in 25 years.
While these figures are impressive, investors should realise that in this period, the market has seen various historic events like the global financial crisis of 2008, wherein the markets corrected by 52% in a single year. Similarly, in 2011, the market was down 25%. In effect, the journey and the investment experience will not be a linear one. While volatility is the norm, what an investor should work towards is utilising market volatility to one’s advantage.
Optimally navigating volatility
While there is no doubt that mutual funds will get impacted during a broad based market correction, the damage inflicted tends to be limited as compared to the benchmark index. As an investor dealing with volatility while in pursuit of high returns and sustainable portfolio growth, it is in your best interest to make uncertainty your friend. This can be done by focusing on accumulating units of mutual funds in the down phase of markets, rather than getting swayed by negative sentiment and stopping your investments. Not only does this enable you to grow your portfolio, but it also helps you benefit from the concept of rupee cost averaging. In the rupee cost averaging approach, while you invest a fixed sum at regular intervals irrespective of the market levels, this ensures that one gets to buy more units when the markets are low and lesser units when they are high. As a result, one gets to average down the cost per unit over the long-term. After the sideways movement or downturn, when the trend reverses, you would have accumulated a larger holding in the mutual fund, translating into higher returns over the longer term.
Focus on the Long-Term
For investors keen on creating and sustaining wealth, the market is the perfect companion for a long-term commitment – the longer you hold on, the better your returns could be, thanks to both rupee cost averaging and compounding effect. Further, focusing on the long-term also allows you to sit back and relax while the market works its magic.
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To conclude, when investing for the long-term, remember the goal attached with the investment. Use the Systematic Investment Plan (SIP) route to invest in a consistent manner across market cycles in a cost effective manner. Redeem only when the goal is on horizon. Do not make the mistake of stopping or pausing SIP just because the markets are volatile.
Disclaimer : This article is authored by P Someswara Rao, Mutual Fund Distributor. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.