By Prashant Dhama
Market volatility, like the one we have been experiencing for the past three months, usually results in anxiety, uncertainty and discomfort even in the most seasoned investor.
To begin with, let’s understand some plain and proven facts. At any point in time, if you decide to start investing in the stock market, it doesn’t mean you automatically become a risk taker.
The real risk is accepting the consequences of your actions, and that too, without the discomfort of fear. But why do we experience this discomfort and end up making investment mistakes?
When a situation doesn’t go as per our expectations and we are not prepared for the resultant unpleasant outcome, it causes discomfort and pain. Up or down, volatility is and always will be an integral part of the stock market. Every investor knows it, but very few really understands it and prepares for it. When an investor starts investing in the stock market, he knows these facts, but he always expects the market to go in his favour, which is practically impossible, to say the least.
The reason why we always expect the market to go as per our expectations is because we don’t understand real market behaviour and play for the fulfillment of our unilateral and unrealistic expectations. Well, the market has its own behaviour, our expectations have no impact on it.
One of the common reasons for investors’ discomfort is the lack of investment goal setting. Many investors start investing for the long term, but panic in a very short time, because they are not sure about their actual requirement from that investment. Realising our requirements and setting a goal for your investment is very important.
The market is uncertain, every investor knows it, but do they really understand it? If we talk about the current scenario, the impact of Covid-19 on the stock market is very uncertain, and investors are tempted to believe that this particular recession is going to be the greatest and longest one of them all.
But history has witnessed an even worse situation during the 1918 Spanish flu, that too just after the World War I. Imagine the death of 3 per cent of the world population in the war, followed by the death of one-third of the world population due to the pandemic.
Right after that, we saw one of the biggest market expansions of the century, which continued for the next 10 years. A similar situation occurred in the mid-13th century Europe, when ‘The Black Death’ wiped off nearly half the population of entire Europe. Still, the European countries went on to establish successful colonies and rule the world for the next many centuries to come.
These kinds of risks are always present and we have to prepare for the before thinking of investing in the market. Proper investment goal setting and self-assessment of risk are the keys. If we do not discount these risk factors before investing, they will create discomfort and pain. High volatility and risk are integral parts of the market, and we have to be ready for it because big gains always come after a deep pain.
(Prashant Dhama is Executive Director & Board Member at iVentures Capital, a Sebi-registered broking and wealth management company.)