Volatility Worries.

Knowing that I am involved in the stock market (even though in a rather peripheral way) many acquaintances often pop the question “So which stock looks good today?”. My standard answer to this is that I only purchase mutual funds by availing of the Systematic Investment Plan (SIP) facility and that I usually do not buy individual stocks.

In the rare case when I do mention a stock or two worth purchasing, I notice that very few of them actually follow my advice. On being asked for the reason, there are two standard comments which I hear. One, “I want to buy but these are such uncertain times for the stock market. I am waiting for things to settle down before I purchase anything”. The second one (loosely related to the first) is “The market is too volatile for my comfort right now”. I get the same response even when I suggest that they commence investing in a few good equity mutual funds through the SIP route.

I think such people will be waiting forever. Volatility will remain a permanent feature in stock markets. Stock prices are the distillate of two primary stimuli : company & macro-economic fundamentals and human sentiment. The advent of internet trading, the rise of business channels, blogs and better communication facilities mean that any perceived change in fundamentals is quickly acted upon by the large mass of traders. The share of human sentiment in stock price determination is rising steadily. Everyone is out to squeeze out the last bit of returns through the use of every trading technique possible. When several traders behave in a concentrated way, prices are bound to react in a more magnified manner.

But this is no reason to stay away from stocks. After all, despite the heartburn that they often give in the short term, they are still the best vehicles for a lay person to participate in the country’s growth. As investors we can only try to manage this volatility either by purchasing stocks at reasonable prices or through modes such as SIPs and Value Averaging. Complete avoidance is neither possible nor desirable, as the non-volatile investments such as fixed deposits and bonds usually offer a very low yield post inflation and post-tax. Besides, there are many studies, both, in India and the USA which have shown that longer the holding period, lower the volatility.

Finally for those who are adamant on investing in stocks only when everything looks good, I can only think of Warren Buffett’s quote “You pay a very high price in the stock market for a cheery consensus”. Also, in a lighter vein I tell them that volatility is zero, only over the weekend when the stock market is closed.

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