Let Not The Volatility Get You Down

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors  

The current downturn in the stock market can be attributed largely to the outbreak of Covid-19. Investors are growing increasingly concerned about the effect it will have on the world economy and businesses. The sell-off in global markets worsened on worries that the Covid-19 outbreak in several countries may have signalled the start of a global pandemic. Clearly, these are testing times for investors, especially for those who are relatively new to investing in equities. While a virus like Covid-19 adds in an element of uncertainty, it is important for long-term investors not to panic.

It’s not that one shouldn’t be worried about what is happening in the stock market; the key is not to change your asset allocation in panic as past pandemics didn’t typically lead to sustained selling. The main advantage of remaining invested is that one minimises one’s chances of missing out on the sudden rallies in the market. Someone who has spent time in the stock market would know that it is quite normal for it to go up and down during certain time periods. Therefore, while a seasoned investor may take volatility in his stride, a new investor could get tempted to react in a manner that may be detrimental to his or her fortunes.

No doubt, the current market situation also provides great investing opportunities too. However, the temptation to time a falling market with a hope to make a quick buck can expose investors to a high-risk situation. Remember, even full-time professionals like fund managers find it difficult to time the market successfully on a consistent basis. Of course, if one has an investible surplus that can be put aside for a longer term, it can be invested as a combination of lump sum and systematic investing.

Considering that market volatility is an unpleasant realty of the marketplace that deters most investors from investing in the stock market, investors must follow strategies diligently that could help them tackle it. To begin with, it helps to diversify the portfolio. Diversification not only reduces risk but also helps in optimising returns on a risk-adjusted basis. For those investing in equity directly, mutual funds can help achieve the level of diversification not possible to achieve through direct investment in equities alone.

It is equally important for investors to ascertain that funds from different fund families in the portfolio do not hold the same stocks in a very high proportion. If they do, it will have an impact on the level of diversification they aspire to achieve through them. Also, one needs to avoid heavy concentration in a specific category of funds, sectors, segment and a particular fund house. Another important strategy is to rebalance the portfolio periodically. Rebalancing is a disciplined method of maintaining proper allocation to each asset class in your portfolio at all times. Over a period of time, the mix of assets in your portfolio may become inconsistent with your original asset allocation.

Rebalancing the portfolio in a planned manner makes your portfolio less prone to volatility. A disciplined investment process is another strategy that reduces the impact of market volatility. Mutual funds offer Systematic Investment Plan (SIP) that propagates making periodic investments of the same amount of money on a fixed date in a pre-decided fund, regardless of whether the stock market is declining or ascending. The idea behind this strategy is to take emotions out of your investment process as you don’t have to worry about the right time or the wrong time to invest.

Besides, this cuts down on the risk that you may normally face while investing a lump sum amount at market highs. Remember, it is very difficult to predict the movements of the market in the short-term. Last but not the least, having a long-term view on investments helps in reducing the risk automatically. If you have a clearly defined time horizon, you can wait for the stock market to recover. Therefore, it will not be wrong to say that the right approach to handle all kinds of markets, especially a volatile one, is to remain committed to your time horizon and remain focused on your investment plan and objectives.