Today, let’s talk about corrections and volatility.
What we experience in a correction is volatility, not loss. It is the very nature of markets to be volatile, and the premium (higher returns for investing in equities) we receive is on account of this volatility that we must face head-on (painful but rewarding). Look at it this way – if the price of equities never fell, they would become sure winning bets. If this would be the case then the return would be the same as compared to any other debt instruments. So, if you have spare funds that can be put away for at least 5 years, then these low points in the volatility cycles are wonderful opportunities to invest more. If you are already invested, then put your TV remote away and watch a movie instead. Read the sports and entertainment pages of the newspaper instead. In short, ignore the temporary madness a.k.a noise. Its been proven by history that markets bounce back after every correction and eventually make new highs.
The world doesn’t end here. History tells us that mankind has continued to progress, and there is no reason to believe this trend would reverse. With progress comes prosperity, and the best way to take part in this prosperity is to invest in equities and stay invested.
Real wealth only comes from an increase in purchasing power, i.e. when your returns beat inflation. Investing in debt instruments (i.e. fixed deposits in banks or bonds) can barely beat inflation, and is therefore not a viable alternative. Interest rates may rise from time to time, but inflation never fails to eat into this in the long run. Equity is the only asset class that has historically returned a very healthy premium over inflation and till date remains the best way to increase purchasing power. This premium will continue, and to reap this we need to stay invested in Equities.
Do not let ”this time is different” worry you. It’s never different – markets correct ever so often and always eventually make new highs. Never forget this. Even the 2008 market collapse (the worst in recent times) is a testament to this. From a high of 6200 points on the Nifty 50 Index in January 2008, the market collapsed to a low of 2600 points in March 2009. At that time, every market pundit predicted that it would take many years, possibly even a decade to recover from what they termed ‘Complete and utter Devastation of the world’s financial markets’. The market was back to 6100 levels in Oct 2010, a matter of just 18 months !!!
We have allocated our investments across asset classes in line with our long-term Financial Goals. This will always remain the predominant determinant of investment portfolio performance. Timing the market has a relatively small impact on our portfolio over the long run.
To sum up, we are witnessing a period of high “Volatility”. These kinds of corrections have taken place regularly in equity markets. As long-term investors, we understand why it is important to invest in Equities and also why it is crucial to stay invested in Equities through these corrections – to reap the long-term reward that this brings.
We will continue to provide you with the reassurance that “it is never different – markets always recover and make new highs”. Staying the course is what will make us successful investors and differentiate us from those who make the wrong decisions and lose out in the bargain.
Please do not hesitate to send a mail or contact us for a chat when media and brokers try and convince you otherwise.
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