When we decide to invest in stock markets, we also need to accept that volatility will be part and parcel of this journey. It’s a lot like driving. At times, you will find empty highways where you can drive fast. At times, you will be stuck in traffic. At times, you will have flat tires. At times, you may have to reverse the car a bit to make course corrections.
So in equities, it’s never a smooth, one-way, constant-speed journey in markets. It is volatile. It is meant to be that way. And that is what gives equity the potential for higher returns.
But reading about volatility is one thing and living through it is another. Very recently, we all faced the horror month of March 2020. Those who have been investing for long enough will remember the recessionary and volatile markets of 2008-09. When there’s blood on the street, negative news keeps flowing, and there is a lot of uncertainty across all asset classes, then it’s not easy for most investors who can be unnerved because of sharp market moves. Many times, people are then triggered into making irrational decisions which leads to unnecessary online trading and exiting at the worst possible times.
There is no denying that when markets swing on the downside, it can be troubling. More so if a significant part of your wealth is invested in markets. Though it’s easier said than done, it is still better to be prepared for such days than to be shocked when they actually arrive.
If you have your thoughts clear about how to deal with volatility beforehand, then it helps you deal with market ups and downs in a better way.
How to clear your thoughts then?
Here are 5 strategies for you to consider:
1 – Stick to Your Financial Plan
Most people invest randomly now and then. As a result, they end up having a directionless portfolio, that goes nowhere. But if you have an investment plan (and I strongly suggest you get yourself one), then please stick to it. It’s not easy in the initial years when you may question whether you are on right track or not. But after a while, it becomes a second nature to ignore market noise and stick to your plan. But that doesn’t mean that you shouldn’t change if need be. So review your investments periodically and determine if your risk appetite is still what it was when the plan began.
If not, then make course corrections accordingly. But the message to get from this is to stick to the plan. Never make a decision in haste, and stick to your long term investment objectives. Warren Buffett states, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
One more unsolicited advice from my side would be to ‘try to’ stop watching the news, as it is a sure-shot way to be triggered into doing something irrational and selling your portfolio at the worst possible time. Hundreds of experts will come and express their opposing views and give online trading tips, which can harm your objectives, and you can get biased. So try to avoid watching it as much as possible.
And if sticking to your plan is something that you find tough, then get yourself an investment advisor. They can help you create a proper financial plan by discussing your financial goals, time horizon and different strategies.
2 – Don’t Stop Investing for your Financial Goals
Very important. When markets fall, many feel that they should stop investing fresh money to contain their losses. But that’s exactly what shouldn’t be done. At the cost of sounding repetitive, short-term negativity can trigger fear but do not let your biases get the better of you. Take your investment decisions wisely, and don’t stop investing.
Instead of fearing a falling market, view it as an opportunity to invest at lower levels so that your future potential profits are increased. So let your monthly SIP in mutual funds continue. Invest during good as well as bad times.
The objective is to stay invested in the long run and achieve your financial goals like your children’s education, financial independence etc.
Stay the course, review your portfolio, get rid of unnecessary clutter and clean up your portfolio. This is the key to making wealth over the long term. However, make sure you do not concentrate your portfolio on your favourite stocks and diversify well. And that brings the focus to the next point, Diversification.
3 – Always Diversify and not Di(worse)ify
Diversification is the key to solid long-term investing that helps meet your future financial goals. But one asset or product will not do well forever. Also, you can’t predict which one asset will do best year-over-year. So, always make sure you diversify sufficiently. Across assets as well as within assets.
Times of volatility offer one such opportunity to review, diversify and rebalance. But make sure you don’t over-diversify in the name of diversification. Just a few mutual funds, a 10-15 stock portfolio is enough for most people.
4 – Manage Your Risk via Asset Allocation
Most of us focus on returns and forget about how much risk is being taken to generate that return. But it’s always suggested to have one eye on risk as well. Being comfortable with your investment plan in terms of risk and reward is one of the best ways to manage a portfolio. Over-diversification can minimise your return, and no diversification can lead to concentration risk.
Also, what asset allocation you choose for yourself depends on your own financial situation, age, financial goals, time available and the amount of risk you can handle.
The ideal asset allocation is probably somewhere between having 0% and 100% equity, i.e. between the two extremes. And different goals can and should have different asset allocations. If you have a well-made plan, then it will help you focus on the long-term despite short-term changes in the market.
And finally…
5 – Talk to Your Investment Advisor if you Can’t Do it Yourself
If you are concerned about volatility and are not sure how you will react to it, then better to hire an investment advisor or a financial planner. They give you personalized financial advice unbiasedly and make you stick to your financial plan. You always go to a doctor when you’re sick, then why hesitate to go to a financial planner to manage your finances?
That’s it.
As I mentioned earlier, you cannot avoid volatility. You have to accept it, embrace it and live with it if you want to invest in equity markets and profit from it. So I hope that with that, you are in a better position to deal with market volatility, in 2022 and in years to come.