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Market volatility is not a friend of the average retail
investor; generally, ordinary investors do not have the patience to stay
invested when markets behave irrationally or when they witness steep
corrections.
At the time of the 2008 financial crisis, the Nifty50 had lost more than 50 per
cent in a single year and eroded wealth of most of the investors as they
scrambled to exit in panic and booked huge losses in the process. The markets
made a sharp recovery the following year when the Nifty returns were
approximately 75 per cent. At its bottom in October 2008, the Nifty50 had
touched 3,096 whereas it today stands at 10,650, which amounts to an absolute
return of approximately 240 per cent.
Several good quality stocks which were beaten down black and blue at that time
are up multifold times from those levels.
This is indicative of a typical market cycle, witnessing a few extremely good
years followed by a bad year then possibly a very bad year. It's not uncanny and
it's the reflection of the boom-bust cycles of the economy. If an investor gets
caught up in the vortex of volatility and ends up exiting his/her positions at
the wrong time he/she not only books huge losses but also misses out on the
opportunity of making handsome gains when the market recovers.
The proven strategy to generate wealth in equity market is to""Buy Right, Sit
Tight". "Buy Right" equates to buying the right companies or good quality names
at a reasonable price and "Sit Tight" means staying invested in them for a long
time to realise the full growth potential of the stocks and to not get bogged
down by the volatility in the markets.
When markets are in correction mode, there are opportunities where good quality
names are available at deep discounts. Investors should take advantage of these
situations to either create a long-term portfolio and obtain good quality stocks
at a discounted price.
Take, for instance, HDFC. An investor who bought HDFC bank during the market
correction in 2008 would be sitting on a 900 per cent gain (excluding dividend,
bonus and split) in a 10-year time-frame. This is just one example. There are
numerous other names where investors who were brave enough to handle the market
volatility at that time made some astounding returns on their investments.
It is important to remember that investors have to take some degree of risk
while investing in the equity markets and only in the long term can one extract
the true value of their portfolios. Short-term volatility or market corrections
are bound to happen during an investment life cycle, the key to success is to
invest in good quality names and ignore the short-term noise.
There is, however, a word of caution that investors need to be cognisant of --
buying right and sitting tight does not mean that investors turn a blind eye to
their investment portfolios. A portfolio should be monitored at regular
intervals -- and if things have materially changed, affecting the investment
thesis for a particular stock, then one should not sit tight or do nothing. An
immediate remedy in these situations is to exit the particular stock, even if it
means incurring losses.
(Rahul Agarwal is Director of Wealth Discovery/EZ Wealth. The views expresssed
are personal. He can be contacted at rahul@wealthdiscovery.in )
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