Navigate Market Fluctuations To Achieve Financial Goals
In an ideal world, our most promising investments would steadily rise in value immediately after we invest. However, the reality is far more volatile. Investments fluctuate unpredictably, often causing considerable frustration. Traders and investors tirelessly seek explanations for these movements but more often than not there is no clear reason. Theoretically, stocks and other assets should remain fairly aligned with a valuation reflecting their fundamental prospects. In reality, they are influenced by various forces unrelated to these prospects.
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This leaves investors perpetually questioning their investment decisions. Market risk and volatility are often confused, but understanding the difference is the key to navigating the financial markets. Here’s a breakdown:
1. Market Risk: This is the possibility of the entire market, or a specific asset class, declining in value. It is driven by factors beyond an investor’s control, including economic downturns, interest rate changes or geopolitical events. Market risk is inherent to investing, and there’s no way to completely eliminate it.
2. Volatility: This refers to the degree of price fluctuation in an investment. A volatile market experiences sharp upswings and down-swings, while a less volatile market has smoother price movements. Volatility is a symptom of market risk, but it doesn’t necessarily translate to permanent loss.
Volatility Provides Opportunities
While history may not be the best guide to future performance, opportunities during periods of market volatility often arise due to behavioural factors, making them potentially enduring. Stocks or any other asset class often sell off more than is warranted due to the over-reaction of investors to a particular event. Hence, it is not surprising that the same asset class can rebound once the fundamental factors are considered more carefully. It thus looks like volatility is not to be feared, but to be embraced.
Here’s how investors can turn volatility to their advantage:
■ Buy more on dips. When volatility leads to price drops, it can present buying opportunities for undervalued assets. Investors with a long-term outlook can see these dips as discounts and potentially increase their holdings at lower prices. Consider investing (more) when market volatility is high. This, however, will take grit as it often goes against our natural inclinations.
■ Engage in rupee-cost averaging. This involves investing a fixed amount of money at regular intervals, regardless of the price. During volatile periods, this strategy averages out the cost per share, potentially buying more units when the prices are low and fewer when they are high.
■ Diversification is the key. Spreading your investments across different asset classes like stocks, bonds and real estate helps mitigate risk. Even if one asset class experiences volatility, others might perform well, offering some protection.
■ Stay invested. Resist the temptation to exit the market when volatility spikes. Having proper asset allocation can help investors maintain this discipline. n Having well-defined financial goals can also help investors ride through choppy markets and stay the course during turbulent times.
■ It is very important to check if the asset mix of your portfolio is not majorly affected by market volatility. Thus, it is essential to rebalance your portfolio and target mix.
Here are some additional points to consider:
1. Risk Tolerance: Not everyone is comfortable with volatility. Younger investors with a longer time horizon can typically handle more volatility than those nearing retirement. Everybody is extremely risk-tolerant during the bull markets and exactly the reverse during the bear markets. Hence, risk appetite can also be dynamic. Most investors don’t understand their real risk tolerance until they go through a severe market downturn with a significant amount of capital invested.
2. Investment Goals: The strategy you choose depends on your goals. If you need your money soon, you might want to prioritise stability over potential gains from volatility. Always ensure to have sufficient amounts in an emergency fund.
Instead of worrying about volatility, there are other forms of risk that need closer monitoring, namely, concentration risk, liquidity risk, reinvestment risk, etc. By understanding market risk and volatility, and employing strategies like diversification and rupee-cost averaging, investors can navigate market fluctuations and potentially achieve their financial goals.
The writer is Partner, Invictus FinServ LLP
■ Email : srinivasbg@invictusfinserv.com ■ Website : www.invictusfinserv.com