How to invest when markets are volatile

The equity market has turned volatile in the last few months due to both domestic as well as international factors that have impacted market sentiments. Every now and then US President Donald Trump’s proposal to put a restriction on import from some countries and their reciprocation is casting doubt on the growth of the global economy. Besides, a rise in crude oil price is putting further pressure on oil importing economies like India.

The frontline indices, although are trading a tad lower than their lifetime highs, there are various other indices and stocks that have witnessed deep cuts. There are many companies that are trading at 52-weeks low. How should an investor behave in this scenario?

The current performance of your portfolio may prompt you to exit from your current positions or stop investing as planned earlier. Nevertheless, the best thing to do now is to stick to your investment plan formulated based on your investment objectives and risk appetite. Various studies have shown that it is a waste of time and opportunity to time entry and exits from equities based on such events. It is very difficult to gauge the mood of the market and predict short-term market moves.

If one had invested Rs. 10,000 in the market in 1991 and had held the investment for 25 years, through the significant number of market events and volatility, it would have grown to Rs. 147,791 (generating an annualised return of 11.4%), notes a report by Morningstar. On the other hand, if one had tried to ‘time’ the market and in the process missed the top 10 performing months during this period, the value of the investment would be only Rs. 18,969 (generating an annualised return of 2.6%). And if one had missed the top 20 performing months, the value of the investment at the end of 25 years would be Rs. 5,523 (generating an annualised return of -2.3%).

An important point to note is that most of these top-performing months have been preceded by months where returns were either negative or very low. The above examples put everything in black and white. If you try to time the market and exit now to re-enter when the market appears stable, chances are that you will make lower returns compared to buy and hold strategy. Hence, remain invested.