Worried about market volatility? NSE says it is temporary!

Published: September 7, 2016 at 11:49 am

“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


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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