Now what does volatility mean for regular investors and how should they position themselves in volatile markets in order to ensure that they remain committed to their financial plan? Investors need to understand that volatility is a part of market cycles and that they must not confuse it with bearish or bullish trends. It is commonly advised to the investors to do nothing and stay invested in the market during turbulent market times. However, this is easier said than done. For an investor whose savings and hard-earned money is out there in the market, to do nothing in a volatile market environment can be challenging. Following are a few steps that one can take to help you make the correct decisions in volatile markets.
Do not make exit decisions in panic
Negative portfolio returns combined with warnings from so-called “market professionals” might lead you to sell some of the investments in your portfolio. Recently when market was going down, many experts in media estimated NIFTY to touch the 9,500 level and the same experts estimated the NIFTY to go up to the 12,500 level when the NDA led government won the elections in May 2019. NIFTY neither went to the 12,500 nor came down to 9,500. As an investor, you must avoid taking investment decisions based on intermittent noise as that can be highly misleading. Instead, you should focus on the long-term prospects of your investments.
Ask your financial advisor to review your portfolio
Before making any sell or buy decision for your portfolio, it is always advisable to ask your advisor to review your portfolio and try to understand the reasons for volatile performance form your adviser. A financial adviser can help you draw out a viable financial plan and guide you through market turbulence.
Make sure your portfolio remains fundamentally strong
Make sure that you have good companies in your equity portfolio to ride out volatility. Fundamentally strong companies are better positioned to weather market volatility and generate stable long-term returns. Once you have identified and included fundamentally strong companies in your portfolio, remain confident in the research because “you don’t get paid for right investment until the market agrees with you”.
Diversify your portfolio – an old but effective medicine in all times
Try to diversify your portfolio across industries, asset class and borders. By building a diversified portfolio you ensure that in extreme market movements your portfolio is not inordinately impacted ie. the loss in one asset class is minimised by gains in another asset class.
Mutual Funds are a great solution for investors as they are managed by professional fund managers who are highly skilled in this field and have good amount of experience. They also come with different options ranging from index funds to dynamic funds. Specifically, a fund with dynamic asset allocation will help investors in volatile markets as the assets allocation will depend on market conditions. Systematic investment plan (SIP) is great investment vehicle for investors as it provides the benefit of rupee cost averaging which ultimately balances out the effect of volatility and provides smooth returns over longer investment horizon.
