Is Volatility your friend or foe? – 2

As we see in the above table arithmetic average of all the scenarios is 10 which feels like in all the scenarios returns will be the same.

As we have discussed in an earlier blog how Volatility is hurting the Valuation of your portfolio. Volatility is acting like a Foe if we are taking it lightly. Market Volatility is not in our control then what to do?

Is there any way to protect our portfolio against the impact of Volatility?

Yes definitely, if we book the profit When the market risk is higher and Deploy money when the market risk is relatively lower, we can not only protect our portfolio but generate the alpha also (higher returns). Following this strategy is nothing but following the Basic rule of investment “Buy at Low and Sale at High”

Let us see how

As we have seen in the above table, how can we be protected against volatility and generate decent returns also.

Here everybody will speak repeatedly that nobody can predict the Peak and Bottom of the market precisely it is next to impossible and anyone who claims so is either a god or a liar. Here I remember my previous article The Fox and its Sour Grapes Original, Variant-1, and Variant-2.

I also agree with the argument that nobody can predict the exact peak or Bottom of the market but it is a fact that without taking any action we are going to face negligible compounding of 2.02% only. If we try and get an accuracy of 75% means we book the profit at a 75% level and also deploy at a 75% level while correcting in the market.

As per the above scenario, we are still in a good position despite achieving only 75% success.

Remember that Managing the Market Risk and Chasing the Market / Following the Trend all are different things.

If you can’t fly then run,
if you can’t run then walk,
if you can’t walk then crawl, but whatever you do you have to keep moving forward.

– Martin Luther King Jr.

Doing something is better than Nothing. 

But for doing something your decision should be emotions-free. There is only one way, which is to develop strategies and follow them.

In the next Blog Article, we will discuss How can we generate Real Compounding in Mutual Funds?