The most important rule of investing is that you should always, ALWAYS, do your due diligence. Research is the base on which profitable investments are built.
Any investment opportunity or asset class is evaluated on the basis of a number of factors, and in this article, we will be focusing on one such metric- volatility.
What is market volatility?
With respect to the market and related instruments, volatility is used to denote the upward or downward movement of the index (market) or an individual asset.
High volatility assets and investments show high deviations from their average price. This makes them riskier. On the other hand, low-volatility assets show relatively less intense deviations from their average price and are generally low-risk investments.
Having said that, the volatility of assets is usually not consistent. Since volatility is influenced by a variety of factors, including the state of the economy and public sentiment, markets may go through sudden and seriously volatile times. In other words, financial market volatility is not constant. The 2020 crash that happened because of the Coronavirus pandemic is a recent example of a sudden and unusual negative deviation from the average.
What are non/low volatility markets?
When economies go through volatile times, non-volatile markets and assets tend to show relatively milder negative deviation from their average value.
Then there are those investment instruments that are not dependent on the performance of the market. With such instruments, your returns are free from market risk.
It is worth noting that most investment instruments are not free of risk. Those that are free of market volatility risks may still have other forms of risk involved.
Stocks and mutual funds are some of the most well-known examples of market-dependent investment opportunities. Within the broader spectrum of stocks and mutual funds, there are high and low volatility options available.
On the other hand, fixed deposits and P2P lending are examples of investment instruments that are minimally impacted by the performance of the market.
How do low volatility/low-risk investments help?
Low volatility investments make a lot of sense, especially in the case of long-term investors. Sure, there is the catch that investing in low volatility assets means that you cannot expect quick, sudden, or high returns since the assets are expected to move within a small range. However, there are many advantages associated with low-volatility investments. Here are a few of them:
Less Worry And Hassle
Before we talk about returns and numbers, let’s talk about something a little more intangible- peace of mind.
If you are someone who is interested in passive long-term investments that don’t engage a lot of your attention or time, then investing in highly volatile assets, even for the long term, can prove to be a source of stress. Sure, staying invested during volatile markets improves your chances of securing a profit, but it isn’t that straightforward.
Think about it, even if you are committed to Staying invested during high volatility market spells, and somehow, after the overall market volatility has subsided, you are able to register a profit, the journey to that point can be nerve-wracking. Every time the asset price goes through a serious dip, you may start worrying.
This is because every time there is a serious dip in the value of one asset, the other assets in your portfolio will feel the pressure. In order to recoup your loss, the other assets will not just have to turn a profit; they will have to significantly outperform the volatile asset.
On the other hand, if you are invested in a safe, less volatile asset that you truly believe in, you can rest assured knowing that even if you register a loss, it will not be significant. Moreover, even when the value of the asset dips, you can rest easy knowing that it will not influence the returns you may make if one of your other assets performs well.
Having said all that, low volatility investments are actually more profitable than risky investments.
Most of us have been led to believe that with higher risk, there is a possibility of making higher returns. In contrast, the lower risk is usually associated with lower returns. However, the reality is quite different.
Something called a ‘low-risk anomaly’ was first noticed in the early 70s by Rober Haugen and A James Heins. The two economists argued that less volatile assets generate higher-than-expected risk-adjusted returns. Conversely, they argued that investments in the most volatile assets often returned disappointing results. They supported their arguments with data sourced from portfolios investing in the US stock market between 1926 and 1969.
The same findings have been confirmed in all observable markets across the world. In fact, the study was conducted with more recent data, recorded between 1990 and 2011. The findings, confirming the findings of Haugen and Heins, were published in 2012.
These findings were again confirmed with more recent data. That study was published in 2019.
How is P2P a low-volatility investment option in 2022 and further?
Even within the spectrum of low volatility investments, there are some opportunities that involve significantly lower risk than others. One such opportunity is peer-to-peer or P2P lending.
Anything P2P refers to transactions that take place between two individuals, with no intermediaries in the middle. So, P2P lending is the practice of lending money directly from the lender to the borrower, with no intermediary in the middle (like a bank).
So, why is P2P lending a great investment opportunity? Among other benefits, the fact that the returns from P2P lending are not dependent on the performance of the market makes them an attractive investment.
On a government-accredited NBFC-P2P platform like LenDenClub, investors face negligible market-related risk. Regardless of how the market is performing, the investors receive their returns without any market impact. In this sense, P2P lending can be considered a low market-volatile investment opportunity.
We hope that this article has helped you understand volatility better, and this knowledge will guide better investment decisions for you. From an investor’s perspective, low-market volatility investments, like P2P lending, make a lot of sense. Make an account on LenDenClub to start your P2P lending investment journey.