Demystifying market volatility: How retail investors can navigate turbulent times
The article is written by Rishi Piparaiya, Best Selling Author and Financial Mentor
As the cliché goes, the only thing certain about markets is uncertainty. Equity markets, in particular, are extremely dynamic. With global markets being even more interconnected, the smallest news in one part of the world can impact markets in another. Volatility is part and parcel of the investment process, but that does not mean it is an untamed animal. A retail investor can adopt various strategies to manage volatility, enhance their returns, and get through turbulent times.
Diversification: The fundamental principle of risk management is diversification. By spreading investments across various asset classes, such as stocks, bonds, and commodities, retail investors can reduce the impact of volatility on their portfolios. A well-diversified portfolio is less susceptible to any single market or industry fluctuations, providing a buffer against unexpected market downturns.
Maintaining a Long-Term Perspective: In the last twenty years, the Sensex has fallen in 95 months and risen in 145 months. There have been 25 times when it has fallen over 5 per cent in a month. The biggest monthly fall was 24 per cent in October 2008. This volatility would have given you sleepless nights if you had a short-term view, but it would not have mattered if you had a long-term horizon. Anyone who entered the market twenty years ago would have multiplied their money 15 to 20 times if they had stayed invested. Historically, markets have always tended to recover from downturns, rewarding patient investors who stay committed to their long-term financial goals. A key to managing volatility is to, therefore, ignore it–in the long run, it will balance out.
Stay Informed: Volatility impacts the unprepared investor; if you stay current with what is happening, you will learn to anticipate, expect and accept market movements. Monitor the news, corporate reports, and geopolitical events, and stay abreast of matters that impact markets. You will not be as reactive to market volatility.
Tactical measures: A tactical strategy that retail investors can adopt is implementing stop loss limits–anytime the market falls below a certain level, it will automatically trigger sales from your portfolio, thereby reducing your losses. This can be a valuable tool for risk management, especially for investors who may not have the time to closely monitor the markets on a daily basis. Another strategy is maintaining large cash balances, thereby giving the flexibility to make purchases when markets fall significantly, potentially enhancing long-term returns. Market volatility can change the composition of a portfolio. You should, therefore, do regular portfolio reviews and rebalance your positions accordingly so that you are true to your long-term goals and desired risk levels.
Remember – avoid any emotional decision-making during volatile times and do not be driven by fear or greed; both will hurt you. Have a long-term strategy and horizon, a clear investment plan, and stick to it. You cannot eliminate volatility, but you can certainly manage it. And whoever does that better is best poised for long-term investment success.
Disclaimer: The opinions expressed above are personal and may not reflect the views of DSIJ.