How Volatile Markets Actually Help You Create Wealth
Unlike commonly prevalent misconception, volatile periods in markets actually help you create wealth in the long term
21 Nov, 2019
One of the most popular ways of accumulating substantial savings for major future needs like children’s higher education and retirement is regularly investing in equity markets. After all, over the long term, i.e. periods of 8-10 years or more, they provide higher returns than other investment alternatives like fixed deposits. For instance, Rs 100 invested in equities represented by the BSE benchmark index, Sensex, at its inception in 1979 was Rs 39,298 on October 18, 2019.
Challenge of getting growth despite volatility: Equity markets experience turbulence from time to time which impacts equity and equity-oriented investments in the short term. Many of those investing in equities directly, indirectly through mutual funds or unit-linked insurance plans (ULIP) from life insurance companies get jittery in such times, with many of them making premature exits at losses. Thus, the sad irony is that despite making the right choice of investment category, they end up losing out on long term growth by not staying invested.
It is not just the historical evidence of long term growth of equities that should encourage investors to stay invested in the market-oriented investments. Market turbulence helps those making regular investments benefit from market volatility. This is more so for those investing regularly in equity markets through regular investment facilities such as systematic investment plans (SIPs) offered by mutual funds. Here’s how.
Cost-efficient investments: In case of SIPs, for the same investment, you get more units when the market is down and lesser units when the market is up. Over the long term, the average cost of buying the mutual fund units goes down. This is also known as Rupee Cost Averaging. Consequently, when the markets rise, you benefit from a greater appreciation for all the units. Thus, you benefit from markets’ downward moves and its volatility.
Helps gain in all markets: While investing in markets regularly through SIPs and other programmes, you don’t have to keep a watch on the markets and try investing during opportune moments. Here, you gain in all market conditions without tracking the markets.
Takes emotions away from investment Turbulent markets often make investors jittery and create conditions where investors make mistakes. By staying invested and continuing regular investments in the markets, you stay on the path of making most out of equity-oriented investments despite different market conditions, including volatile markets.
A smart sailor on a sailing yacht in the seas needs the wind and the waves to take his vessel ahead even as a less experienced sailor might get nervous. Similarly, in equity markets, volatile periods are opportunities that can actually help your money grow. It’s time to conquer a common fear.