How market volatility is an opportunity while waiting for the long term
By Jinesh Gopani
There is a popular adage in the investment world that goes, “The market is designed to move money from asset to patient. Investing isn’t about hitting jackpots, it’s about building wealth systematically. Often the word ‘volatility’ scares us because we think it’s the ultimate risk quotient for an investor. While this certainly signifies the unreliability of an investment, it is not the only risk an investor faces. In fact, when properly harnessed, volatility can be an ally for the long-term investor. Let me explain with a small example.
A few years ago, Amit’s cash flow was around INR 25,000 per month. He was afraid to invest his money in the stock market because of its “volatility” and the failure of capital loss. A few months later, Amit joined a group that would discuss “investments” (in stocks, debt, and hybrid programs) and “principles of investing” (long-term, quality investing to create wealth). Although he refrained from participating at first, the group became a learning experience for him. Emboldened by her knowledge and their support, he started investing in mutual funds at a small SIP of INR 2,000 per month. He diligently followed the markets and understood the various risks, market cycles and the importance of staying disciplined. Eventually, her small SIP provided her with sufficient capital to finance her daughter’s higher education abroad. Amit’s background may not be representative of everyone, but there are a few key takeaways for all investors.
The above example clearly demonstrates that investing requires patience, commitment, discipline and the ability to take ownership. Often, investors panic when markets become volatile. They tend to be swayed by what they read or listen to and end up making hasty decisions without realizing that such an emotionally charged decision can cause the entire portfolio to underperform.
It is imperative that investors understand that signs of economic weakness do not mean the economy has stopped expanding. If invested in ‘quality’ focused businesses, they are likely to survive market volatility. The rise and fall of the market are part of a larger cycle. Take a moment to look at the Nifty 200 Quality 30 Index TRI which clearly shows how quality has been a prudent investment option for long-term investors.
Source: Axis MF Research (Data through April 30, 2021) Disclaimer😛Latest performance may or may not be maintained in the future
Quality companies are unlikely to put the brakes on their expansion plans during a potential downturn or change in market value. The drop could be due to a host of reasons that have nothing to do with the viability of the market. There may have been a technical problem or a change in the management structure that caused the stock price to correct.
Seasoned investors themselves will say that often when a stock loses a margin of its value, the price is determined by emotions and not by fundamentals. Consider the chart below which shows how the performance of quality investments (with the exception of four separate years as shown below) can withstand long-term economic shocks over multiple investment cycles.
Source: Axis MF Research (Data up to March 7, 2022) Disclaimer: Past performance may or may not be sustained in the future
So why should you, as an investor, be derailed by short-term irregularities and miss the greatest opportunity at hand? In fact, daily price fluctuations or volatility should not stand in the way of assessing the intrinsic value of companies. One should research the business and understand its business model thoroughly, before investing in it or rushing to sell it during a market down phase. If an investor continues to wait continuously for risk to manifest, he may lose investment opportunities.
The current environment could cause well-founded worries in the minds of investors. Stock markets are expected to remain volatile and we could see some sharp corrections in the near future until there is some semblance of normality in macro indicators. However, seasoned investors understand that volatility and returns are mutually exclusive. In fact, a correction (even a minor one) can be used to supplement and reposition your portfolio to build long-term wealth. It allows investors to focus on emerging sectors in their portfolios. Frequent corrections in the middle of a rising bull market can be a healthy sign of a long-term growth story and, more importantly, an opportunity for wealth creation.
It is imperative that we invest in companies with a long-term investment horizon and adopt a cautiously optimistic approach. Investors who are willing to take an active interest in managing their portfolios and focus on achieving returns that will take into account potential risks or inflation (or both) have the opportunity to generate and exploit solid long-term wealth opportunities, even in the face of volatility!
(The author is Head Equity at Axis Mutual Fund. The opinions expressed above are those of the author and not necessarily of financialexpress.com. Investments in mutual funds are subject to market risk. Please consult your financial adviser before making any investment decision)