Worried about market volatility? NSE says it is temporary!

Published: September 7, 2016 at 11:49 am

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“Stay invested” is the mantra adopted by AMCs,mutual fund distributors and financial planners. Amused to find that NSE India also says the same in an advertisement titled, “Worried about market volatility? Here’s how to deal with it.”

The advt has four messages, three of which can easily be misinterpreted by readers to say the very least.

This is a photograph of an advertisement from NSE India that appeared in the March 21st 2016 issue of India Today.
This is a photograph of an advertisement from NSE India that appeared in the March 21st 2016 issue of India Today.

1 Understand Volatility: Volatility is intrinsic to markets. Volatility corrects market excesses, on the upside and downside.

Agreed, volatility is intrinsic to the markets and is the single most important reason why an investor gets real returns. Gains are not possible without losses and vice-versa.

2 Volatility is temporary. By its own nature volatility is temporary. Once the volatility phase is over, markets return to normalcy.

Sorry, this is incorrect and inconsistent with the first statement. If volatility is intrinsic to the markets, it will never go away. The only normal state of the market is the volatile state.  I had earlier shown quantitatively that the market volatility is the same regardless of the duration considered. Read more: Understanding the Nature of Stock Market Returns.

The main reason I write this post is because many investors believe this “volatility is temporary” story.  The risk associated with the stock market will never reduce on its own simply by investing for the long term  and holding through ups and downs. Risk has to be actively managed.

The main reason for this “belief” is equity investing is sold this way.

3 Markets reward performance.  Stock prices are about earnings – present and future. Markets always reward performance in the long run.

This gives the incorrect impression that an investor will be rewarded in the long run. Sorry not true at all. Please have a look at how volatile a “long term” SIP in the S&P 500 or the Sensex can be. Returns can just about be anything.

Sensex: 15-year rolling SIP returns

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Read moreDollar Cost Averaging aka SIP analysis of S&P 500 and BSE Sensex

4 Stay Invested. Over the long term, stock markets give the best return of all asset classes.

Is this factually correct? Can I not pick and choose durations to prove or disprove this statement? Even our short market history has had extended periods of sideways markets where the returns are worse than a fixed deposit. The above graph is proof.

Questions like, “why can’t I invest 100% in equity if it will give the best return?”, “Why can’t I invest only in small cap and micro cap funds if they will beat other categories over the long term?” Arise from such incorrect perceptions that are baseless.

Finally, the ad has the standard disclaimer in small font: Stock market investments are subject to market risks, read all investment related documents carefully.

Sigh! The fault is not with NSE. It is a market participant and will naturally advertisement in an enticing manner. The fault is those with who take such messages seriously without understanding risks and the need to manage it.

Caveat Lector. Caveat Emptor.

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Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various topics of money management. He is a patron and co-founder of “Fee-only India” an organisation to promote unbiased, commission-free investment advice.
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  1. An eye opener.

    But at the end, whats the take away ? 🙂

    I am investing around 12000 per month on Diversified Mutual Funds for a long term horizon 15 years or so . Your post pushed me to rethink. Specially after looking at the 2 charts.

    Any suggestion?

  2. problem is there is too much easy information, very little due diligence or understanding, too many safal vinashaks and personal finance bloggers, too much laziness, too much greed, very little patience and of course very little money.


  3. Learn to manage the risk- easily said than done. But,is this not what is expected from Mutual Funds from well managed MF’s. Most of the Investors never understand the Investment Mantras- so why bother? I believe e a combination of Equity and Debt funds with a couple of MF’s including a contingency fund as FD will be sufficient for all those who are happy with an additional 2 to 3 % return over prevailing inflation rates. If I have gone to an expert Doctor , I should follow his advice rather than confuse myself with all messages from the net.

    1. “Most of the Investors never understand the Investment Mantras” True. If they don’t understand, or can’t understand they must have the maturity to see professional help. They do not understand the value of that too. So …

  4. This is one reason to like balanced funds. If you compare any balanced fund with the equity fund of same fund house (preferably equity managed by same manager) you can see that they mostly give same returns but with less volatility, for e.g., hdfc equity vs prudence. By their nature some risk management is also embedded into them (portfolio re balancing should happen when market moves too fast in either direction). It would be so better if there are balanced funds with equity theme (like midcap, index etc).

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