How to make most from Markets’ Volatility. We have heard Marketsare highly volatile, and that stops so many of us from investing. But at the same time equity outperforms other investments.
Firstly, we should understand the opposite of word ‘fragile’. Generally, people say it is robust or unbreakable, but as we all know when asked for opposite of positive everyone will say it is negative. Why not zero? If opposite of fragile is robust then opposite of positive can be zero. This I say because we relate “Handle with care” for fragile object but we never relate “Please Mishandle” for unbreakable object.
This brings us to the answer, the real opposite of fragile is those objects that benefit from shocks or adversity. This may sound absurd. One might say that there are things that can resist shocks but objects that benefit from shocks is not possible. Nassim Nicholas Taleb, in his book “Antifragile”, he has explained that there are many things that actually are the true opposite of fragile.
Markets are volatile and we have often heard the anchors of TV channels and the headline writers always assume that since the equity markets are oscillating sharply, dropping on ore days than they rise on, it’s a bad time for investment. The traders whose success and failure depend on predicting correctly what will happen from one day to another will suffer due to volatility.
So, is there any investment strategy available that would bring in gains of equity investing and yet actually gain from volatility to ordinary savers, who either don’t have to follow markets and predict or does not have the skills needed for the same?
The Answer is YES and it is SIP (Systematic Investment planning). It is not something very new, many smart mutual fund investors are practicing this.
SIP allows an investor to invest a fixed amount regularly in a mutual fund scheme, typically an equity mutual fund scheme, typically Equity Market.
One of its major benefits is Rupee Cost Averaging i.e. SIP helps you average the investment cost and maximize returns, this is where the anti-fragile nature comes into picture. SIP is the simplest and yet most powerful technique of benefiting from volatility.
In SIP you invest a fixed amount every month for a long time. This ensures that you buy more shares of investment when the stock prices are low as the NAVs of equity mutual funds also reduces. Eventually once you redeem your cash, all units fetch you an equal amount. However, gains are higher thanks to volatility. That’s antifragile-Benefitting from volatility. You make more money precisely because markets are volatile.
SIPs are essentially a psychological trick to save regularly and invest regardless of whether the market is down or up. It’s the routine that locks investors into an inertia which turns out to be beneficial for them.
When one looks at investing with this Taleb’s fragile-antifragile framework in mind, it’s immediately obvious that short-term trading is ultimate in fragility and long-term SIP is ultimate in antifragility.