Equity markets are volatile! What to do?

Many of today’s equity sales people (never mind if they are hawking mutual funds, direct equity, pms, or life insurance) may not really have a perspective on the long-term positive attributes of equity investing. Certainly, equity markets do not always deliver positive returns in a steady upward fashion. Nor are they obliged to do so. Instead, equity markets are volatile. This short-term volatility is the reason we expect a long-term real return.

July 2008 was an ugly month for equities – nationally and internationally. A combination of oil prices hitting record highs and bad news about credit and housing in the US caused the indices to give up a lot of its gains – tough pill to swallow.

Sudden and sharp drops in the stock market make for scary headlines and unfortunately high TRPs! However, they can also make for sleepless nights for investors who look at drops in their net worth without an awareness of the ample backdrop of historical data that shows we have been here before and eventually recovered the loss. The other problem for never say die bulls is the temptation to buy. This happens because of a disease named “anchoring” – “I have seen L&T at 4320, so it must be cheap at 2745” or “I have seen SBI at Rs. 2450, so it must be cheap at Rs. 1345”. I am not here to teach behavioral finance, but I am sure that you get what I mean.

For this reason, an understanding of stock market history enables investors to maintain confidence in capitalism and the long-term staying power of the equity markets. Reading a Peter Lynch or Buffet or Fisher surely will help you go a long way.

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