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Today the Indian stock market fell by around 1.5% and has fallen by around 4.8% in the last four sessions since the budget. We all are feeling the pain of the downturn and the rise in the volatility. Just to put things in perspective, even after this correction, the Indian equity market has given a gain of 19.3% in the last 1 year and 42.1% in the last two years.
What is volatility? It is the day to day unpredictability of markets. If there are too many changes in stock prices every day then the volatility is high. If the changes are smaller and predictable then the volatility is low. For example, Fixed Deposits have no volatility because their price will move only in one direction predictably.
We all want stock prices to just go up every day and let's say this happens and everyone knows about it. Then the market participants will invest all the money today itself to maximize the gain in the future which also means that the prices will just skyrocket and no one will be able to buy anything. If we take the reverse situation where all stock prices will just go down every day then the market participants will take out all the money today itself to minimize the loss in the future. The prices will just crash and no one will be able to sell anything.
Please remember that in every trade there is a buyer and there is a seller. Both of them think they are right! The volatility of the equity market, a.k.a. the uncertainty keeps this interesting and provides ample opportunities to make good returns in the long-term. Without volatility, we will all be making negative real returns (adjusted for inflation) ultimately leading to wealth erosion.
What is the secret to befriend volatility?
1) Ignore the daily noise and change in the market. You won't remember it after a few weeks.
2) Keep the long-term asset allocation in mind and ensure that it is adhered to. You will always remember the long-term returns.
3) Stay true to your financial goals and save in a disciplined manner. What matters is achieving the financial goals and having the money when you need it.
4) Follow the process discussed between you and your relationship manager. This will increase the probability of achieving good returns much higher.
5) Focus on risk management. It is more important to protect the downside than to catch the whole upside of the market.
Many of you would ask about the next steps in such a scenario. A good investment process should be designed in a manner that accounts for both ups and downs of the market so increased volatility does not change the fundamental approach. As such, the concern about the LTCG tax does not make the equity markets unattractive as I said in my last post.
The writer is the Managing Director of Mitraz Financial Services Pvt. Ltd and can be contacted at firstname.lastname@example.org