Volatility is not the same as Risk

It’s been a tough start for global stock markets in 2016. S&P 500 is down by about 8% YTD and it could go even lower. Does that mean you shy away from the market? Not necessarily…

By nature, stock markets are volatile; sometimes they go up and sometimes down! There have been 123 corrections (10%+ declines) and 32 bear markets (20%+ declines) in the last 100 years. You should expect a 10% correction every 10 months and a 20% bear market every 3 years.

Then why should people invest in stock markets, at all?

The answers lies in the wisdom that one should not confuse volatility with risk. While volatility causes temporary drawdowns, risk translates to permanent loss of capital. Based on historical data, S&P goes up about 55% of the weeks. If you are concerned about the remaining 45% of the times it goes down, you will be missing the juicy annual returns provided by stock market. Historically stock market, with its average returns of about 8%, has handily outperformed any other investment, including real estate. Of course, the caveat is that you are expected to endure a bumpy ride on the way!

What should be your game plan then?

1) Expectations tempered with realism: If you go for swimming, expect to get wet. If you get into a boxing ring, expect to receive a few punches. Similarly when you get into stock market, expect drawdowns.

This awareness alone would do wonders to your psyche.

2) Stick to the plan: If you are a trader, stick to your trading plan. If you are an investor, don’t check your portfolio every day (Would you keep checking the price of your house every day?)

Bottom line. Volatility does not equate with market risk. It’s the nature of the market to be volatile. Be aware of the difference, stay the course and don’t be shaken out!

Written and contributed by Venkat Yerubandi