Volatility is inherent to the stock markets as share prices change starkly in a very short span of time. Most investors find this scary and, in order to sleep peacefully, they eschew equity investment altogether.
However, this is not necessary. Though short-term market swings can give you negative returns, in the long run such phases of zero growth are averaged out. Over decades, equities generate higher returns than less volatile instruments and are less risky than the apparently safe instruments. This is what investors do not realise and chase quick returns from the market while looking for long-term safety in debt.
Short-term share price fluctuations are influenced by fads and news. In the long term, only the good businesses survive. So the investors who let their fears overwhelm their good senses are the ones who lose out when the markets are volatile.
Consider the graph showing investor emotions in the short term. As the market swings down, investors move from anxiety to fear and, finally, panic when the market hits the bottom. This is when most investors exit the markets and ignore the opportunity to invest more at low valuations. Subsequently, the markets rise again and this process evens out the negative returns in the long run.
