Volatility – An Investor’s Best Friend In Wealth Creation

Hemal Shah is a young IT professional. Though his take home salary is Rs. 90,000 per month, he avoids investment of any sort in equities or mutual funds due to his capital protection mindset. 

One day, out of curiosity he joined an investor group on social media. He refrained from actively participating in the group, but he read the posts with great interest. People in the group helped each other by sharing their stories through posts and videos. Everyday became a new learning experience for Shah. He realised that contrary to popular belief, mutual funds are not speculative instruments. 

In fact, with proper planning and patience it is definitely possible to create wealth by investing in mutual funds. His worry about the safety of his capital dissipated, and he started his first systematic investment plan (SIP) with Rs. 5,000 per month in 2002. Satisfied that his capital was safe, Shah increased the SIP amount to Rs. 10,000 per month in 2004. 

He diligently tracked the funds he had invested in. The investor group on social media made him aware of market cycles; hence he didn't panic during volatility. He made a point to celebrate whenever market was hit by volatility. This might sound weird but it has a sound philosophy behind it. Shriram, the group’s administrator termed volatility as investor's best friend; according to him volatility is the fuel, which helps the market to propel itself higher. 

In 2015, Shah's portfolio stood at Rs. 27.52 lakh, against the investment of Rs. 13 lakh, enough to cover higher education for his daughter. Today Shah is a fierce advocate of investing early and sticking to the fund if it is performing well.

In case of Shah the regular habit of investing helped him fund his daughter’s higher education though he never planned it that way. The small but consistent saving and investment can help you reach your life goals, which you would never accomplish with salary alone. While investing you have to learn to live with volatility. Instead of viewing volatility as a threat you must consider volatility your friend in wealth creation. You can never tame the volatility, but you can exercise prudence by investing in a systematic manner, which can help you to minimise the impact of volatility in your portfolio. The speculating investor always loses while the calculating one always wins. 

Shah's example clearly demonstrates that investment requires patience and commitment. Many times the investor panics when markets turn volatile. In a desperate bid to protect the capital he begins to take a wrong decision which eventually leads to frustration and underperformance of the portfolio. In case of Shah, he celebrated the fall in the market because it provided him an opportunity to invest more. This is the winners’ mindset. Many investors stop their Investments or withdraw them when the panic ensues in the market. Smart investors like Shah invest more in the event of fall in the market.

Mutual funds are able to generate wealth year after year because unlike retail investors they know that the sign of economic weakness does not mean a halt in expansion of the economy. Businesses do not put brakes on their expansion plans during slowdown, why then as an investor you should stop investing when market passes through the downturn. The rise and fall in the market is part of larger cycles which dictate that every fall in the market is followed by aggressive rise of bull market.

If the investor waits for risk to play out, he might lose opportunities to invest. Many investors get carried away by pure emotions. A good company’s fall does not necessarily mean that the business is not viable anymore; the fall may be due to technical reasons which have nothing to do with the company. A stock losing the tenth of its value simply suggests that its price is driven by emotions and not fundamentals. In order to be successful in terms of financial investment, one must research the company and understand its business model extensively. Before the investor makes a beeline to sell the stock, he must remember the adage, “when everybody is selling, it is perfect time to buy.” 

In the words of Warren Buffett, the market is designed to transfer money from active to patient. The patient investor who remains unperturbed is rewarded handsomely by the market. Remember investing is not about hitting jackpots, it is about creating wealth in a systematic way. 

The author is the Founder, Investonline