HERE’S HOW TO TACKLE STOCK MARKET VOLATILITY

The equity market’s performance over the last year or so has been at par. However, keeping in mind its tendency to turn volatile from time to time, there have been periods of uncertainties, testing the resolve of both seasoned as well as new investors. Despite such a good show by equity market, the low participation of retail investors testifies how the equities are still perceived to be a risky asset class. Needless to say, by focusing on short-term catastrophes, many investors stay away from equities, thus jeopardizing their financial future. It’s high time for investors to look at equities differently and give themselves an opportunity to earn positive rate of return over the longer term.

However, to do so, investors must change their perception about equities. Volatile markets often make investors grapple with dilemmas such as: Should I exit my equity fund portfolio and move into debt funds? Is this a great buying opportunity?  Should I redeem my holdings now and reinvest just before the market starts moving up? How long will the downturn last? These dilemmas often make it difficult to take a rational decision. It is important for investors to realise that every market-linked product has the tendency to move up and down in line with the market movements.

The best way to tackle the volatility is to plan one’s investment with a clear idea of time horizon and investment objective. Another important factor is to follow an asset allocation model as it allows investors to diversify their portfolio between asset classes, thus creating the right balance between risk and reward. If you are one of those investors who plans your investments but still feels the urge to make abrupt changes to the portfolio when faced with uncertain times, it is important for you not to act in haste. That’s because your well thought out investment plan is likely to remain relevant even through turbulent times.

[PAGE BREAK]

The key, therefore, is to go for continuity in the investment approach on a long-term basis rather than adopting haphazard short-term strategies. Always remember that a disciplined investment approach without any doubts takes care of most of the imperfections in the market. Although systematic investing is often perceived as an option only for retail investors, its utility as an approach has nothing to do with the size of the investment. It benefits investors partly, because they abandon any strategy that might prompt them to time the market. Also, partly because in the long run stock markets tend to perform better than other asset classes.

It is ironical that investors who always dream of ‘buying low’ develop cold feet when the markets offer great long-term investment opportunities. Clearly, their fetish for catching the market bottom often repeatedly makes them wary of taking the plunge. Besides this, the market’s dips also present an opportunity to find out how fool-proof your investment process is. Therefore, the best way to tackle market declines is to stick with your portfolio, provided you are sure about the quality of your portfolio and the asset mix in it.

However, if need be, you should also be prepared to realign your portfolio. If you are an equity fund investor, you can do so by moving investments from non-performing funds as well as from those that might have taken you beyond your defined risk levels in the market frenzy to those funds that have the potential to provide better and consistent results as the markets start recovering. If you are a first-time investor looking forward to building a portfolio to achieve long-term goals, initiating the process slowly and steadily might not be a bad idea after all. Of course, the key would be to adopt a sensible approach of spreading risk by investing in a carefully selected mix of funds.

Don’t get tempted to invest in funds that may have witnessed the steepest fall during uncertain times to maximise your gains during the recovery process. That’s because in a falling market some of the funds like mid-cap, small cap as well as sector funds suffer the most. Considering the risks associated with these funds, you may end up compromising on some of the most important ingredients of the portfolio building as well as hampering your chances of building a well-diversified portfolio that holds the key to handling different market conditions.  As is evident, dealing with market volatility is far easier when you have an investment strategy in place. Moreover, by reacting sensibly and in a composed manner, you can hope to build a sound financial future.