Volatility is Good!
- Jayesh Gala
- Apr 4, 2018
- 2 min read
Thick forests are good for environment, all of us would agree. But thicker the forest the bigger is the risk of big destructive forest fire. Not only is the probability of fire more but also the severity of fire is a function of the density of the forest. If fire starts in a thick forest it can burn down acres and acres of it and also endanger animals who inhabit them. In order to keep this under control forest authority’s deliberately light up small controlled fires that reduces the density of the forest and this act prevents a larger fire in the future. Short term pain for long term gain. Bull markets are like thick forests. They also need healthy corrections from time to time for it to sustain. If market continues to rise without correction, it can turn into bubble which eventually bursts and hurt investors.
Volatility scares investors, they wish to invest in an environment which displays stability and zero uncertainty. However it is volatility in short term which creates opportunities for investors to make better returns and more wealth in long term. Volatility gives new investors a chance to catch up with those who have started investing before them.
Also as you increase the time frame for your investment, the volatility starts coming down. Starting from 1990 over the next quarter of a century, here's how an investment each year in BSE Sensex would look 6 years later. You would not have seen a single loss in any six-year period over the last quarter century!
True, a few of these six-year periods end with very dull returns. But then again, that's like saying the worst that could happen over any given six-year period is you make little or no money but capital remains intact. Also more often than not, over any given 6-year period, you'll be walking away with good returns in long run! As you increase your investing horizon beyond six years, stocks quickly start looking like 'low risk-high return'. And the bigger risk then becomes earning little or nothing by way of inflation-adjusted returns with debt instruments like fixed deposits.
Systematic Investment Plans in Mutual Funds takes care of near term volatility, add to that the 8th Wonder of the world "Compounding" and you have powerful combination for Wealth Creation.
So always remember Volatility is not necessarily bad!
Disclaimer :- All investments are subject to the financial and market risk. Investors should re-assess information provided herein before investing. Mutual Funds are subject to market risk. Past performance may not be sustained in future.
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