The best way to generate wealth in a volatile market

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Nifty Annual Return.

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…writes Rahul Agarwal

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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.

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