Let Not Your Faith Waver

Hemant Rustagi
Chief Executive Officer, Wiseinvest Pvt Ltd.

The volatility in the stock market over the last few months has been testing the patience and perseverance of investors. In times like these, certain concerns begin to weigh on their minds. As a result, they either begin to doubt their investment strategy or make some abrupt decisions that can derail their investment process. As the market place consists of investors with different temperaments, even the reactions vary significantly. For example, in a falling market, while some of the investors may feel compelled to sell, some others may see it as an opportunity to invest.

However, the right way to tackle such a situation is not to react and maintain the focus on your goals and time horizon. By remaining committed to your time horizon, it becomes easier to tackle tough situations. Each time the stock market turns volatile, investors are faced with a situation where a healthy looking portfolio starts showing dramatically shrunk profits or even losses.

Investors need to realise that any impact on portfolio valuations due to market volatility is short-lived. As the markets turn around, portfolios start looking healthier again.

That’s why it makes sense to not only remain invested but continue the investment process sans any interruption.

At times, the frequent bouts of volatility make investors wonder how they will make money from their equity portfolios. Since stock markets have the tendency to be volatile, investors experience ups and down of varying degree from time to time. But, it is also a fact that in the long term, the stock markets generally go up. That’s why equities have earned the reputation of being an asset class that has the potential to earn positive real rate of return for investors. Thankfully, there are strategies to turn volatility to your advantage. One such strategy is to remain committed to your time horizon and continue investing in a disciplined manner.

Then, there is an issue of some of the funds in the portfolio falling more than others. This often prompts some of the investors to act in haste. In reality, a mutual fund portfolio may have a mix of diversified, Mid-Cap, Large-Cap fund in a falling market. Investors who follow a haphazard approach to investing may end up owning aggressive funds that may fall more than the average.

For example, following a strategy whereby one invests only in funds that are the ‘flavour of the month’ is more likely to create a situation like this. Therefore, if you wish to be a successful long-term investor, it is imperative to design a well-balanced portfolio. It is equally important to understand the likely impact on the performance in case the market turns bearish or volatile. Many investors often feel that when they book profits, the market continues to go up and when they don’t, it falls. This is a situation that investors face many a times. Actually, this happens when one tries to time the market.

It is a well-known fact that even the most experienced fund managers find it difficult to time the market successfully on a consistent basis. No wonder, when a common investor tries to do this, he invariably finds the market moving in the opposite direction. The key is to realise that extraordinary returns in a year shouldn’t become a benchmark for future returns. Similarly, after a bad year, things can turn around swiftly. Therefore, the focus should be on annualised return rather than looking at each year’s performance as a yardstick to measure performance. In short, while it may be easy to get swayed by the changing scenarios, what is important is to maintain your cool, and position.