Mistakes To Avoid In A Volatile Market

Hemant Rustagi
CEO, Wiseinvest Advisors

A volatile stock market, like the one being witnessed currently, challenges the patience and resolve of both seasoned as well as inexperienced investors. No doubt, the new as well as not-so-experienced investors, especially those who don’t follow a disciplined investment approach, usually find it more difficult to tackle the visible signs of weakness in the market. 

As has been observed time and again, in a situation like this, the first instinct of such investors is either to abandon their investment process or start doubting the potential of equities to create wealth for them. The ups and downs in the value of their holdings affect their psyche as they do not plan their investments in equity markets. Many investors end up investing in “flavour of the month” type of funds that make their portfolio quite risky and volatile. 

However, for investors who initiate their investment process after defining their investment objective, working out time horizons, and selecting their funds well, the situation could be different. It is not that market volatility does not worry such investors. The fact that they follow a disciplined investment approach and have a clear idea about how long they can remain invested is the reason they usually don’t face the dilemma of how to react to such situations, and hence are able to withstand the vagaries of the stock markets.  

It is equally important to develop a portfolio consisting of funds that have quality portfolios and a consistent performance track record. Historically, it has been proven that a quality portfolio always recovers lost ground. Therefore, investors must put market declines in a proper perspective. Equity fund investors need to understand that even though most company stock prices are impacted during volatile periods, it doesn’t necessarily mean that the companies themselves are faring poorly. Moreover, short-term movements in the market do not take away the ability of equities to out-perform other asset classes in the long run. 

The key, of course, is to carry on with regular investments during these turbulent times. Those who remain committed to their time horizon and a disciplined approach benefit the most when the market rebounds. Remember, any attempt to time the market can jeopardize your financial future. While it might work when the stock market is on its way up, consistent success comes mainly from a strategic and deliberate approach. Remember, spur-of-the-moment investment decisions based on short-term market trends can prove to be very costly. For example, by moving money out of equity funds during turbulent times can make you miss out on gains when the market rebounds.

Now, a word of caution: Don’t get tempted to make a quick buck when the market corrects. You must know that even when the market levels may look attractive to make quick money, it is vital to follow the same investment principles that one would in normal market conditions i.e. focus on suitability of the scheme, invest for the long-term, and go for a quality portfolio.

Also, avoid investing in funds that witness a huge fall in the NAVs during the turbulent times. Many investors get tempted to invest in such funds assuming that they would gain the most once the market rebounds. It can be suicidal to follow a strategy like this as funds that witness the maximum falls could be those that have a poor quality portfolio or the ones that are aggressive by nature such as mid and small-cap funds, thematic, as well as sector funds. Many of these funds would probably be among the last ones to get back to their original NAVs.  

Another dilemma that equity investors face is whether it makes sense to switch to more conservative investments in a down market. The fall in equity portfolio value along with the negative news flow add to the anxiety. While moving money from equity funds into more conservative options like debt funds and fixed deposits may seem like a sensible thing to do, the fact remains that selling in a down market can be a costly mistake. A haphazard and extremely cautious approach can expose you to the risk of falling short of a long-term financial goal. The wise approach, therefore, is to keep your focus on your long-term investment goals and continue the process of investing in an asset class like equity, irrespective of the market conditions.