Heres How To Prepare For Market Volatility

Hemant Rustagi
Chief Executive Officer, Wiseinvest Advisors 

An increasing number of investors have been adopting a goal-based investment process over the last few years. The fact that they follow a disciplined investment approach through Systematic Investment Plan (SIP) to achieve those goals makes the entire process even more effective. A goalbased investment process allows an investor to direct his investments in a manner so that he has sufficient money at every stage of his life. Besides, an asset allocation strategy propagated by this goal-based approach allows him to build a diversified portfolio across different asset classes based on the time horizon for each of the goals.

However, the last one year or so has been quite challenging for equity investors. The market volatility has been testing their patience and perseverance. Although volatility is a natural phenomenon in the market, the intensity, length and frequency of the declines makes things challenging for the investors. Its times like these that tend to test the nerves of even the most seasoned equity investors. No wonder, things become even more difficult for those who are new to equity investing. As the market place consists of investors with different temperaments, even the reactions vary significantly.

Investors who began investing in equity and/or equity-oriented equity funds over the last couple of years are a worried lot. Poor/negative returns are worrying them as they are wondering whether they will be able to achieve their investment goals if the current volatility persists for a longer period. Although it is quite natural for the investors to get panicky during a market situation like the current one, it is possible to be prepared for such periods and reduce the chances of making haphazard decisions, if not eliminate it altogether.
 
Investors need to just do a few things right at the start of their investment process as well as during the defined time horizon. If you are one of those investors who are worried about the fate of their equity fund portfolios, here is what you need to do:

Estimate the target amount correctly- This is important for long-term goals like children’s education, marriage and retirement planning. You must consider inflation as well as keep a cushion either by increasing the target or by considering conservative probable returns from the portfolio. This will ensure higher investment amount over the defined time horizon. For example, if the time horizon is 10 years or more, estimated return should not be more than 12 per cent, even though historically the returns have been higher for this kind of time horizon. Another option is to have a cushion of a year or more in the time horizon. For example, if the time horizon is 10 years, you should assign a time horizon of 9 years for the goal to have time on hand required for the recovery in the portfolio valuation during volatile periods.

Rebalance your portfolio- Considering the possibility of the stock market remaining volatile for longer periods, it is important to start rebalancing the portfolio in terms of asset allocation around 18-24 months before the completion of the defined time horizon to protect the gains accumulated over the years. For example, a retirement portfolio should be realigned from growth-oriented to income generating one closer to the retirement age. Rebalancing will allow you to reduce the exposure in equity and increase allocation to debt to make it conservative. It also ensures that you remain invested in different asset classes and hence do not miss out on gaining from the positive market movements from time to time.

Follow an asset allocation model- Asset allocation allows you to control the risk, based on your time horizon and risk profile. Longer the time horizon, higher the exposure to equity, and vice-versa, for a shorter time horizon. Simply put, it will ensure that you do not have a very high exposure to equity for medium term goals and very low exposure, if at all, for short term goals. This strategy also allows you to avoid a situation where you may feel compelled to make some haphazard investment decisions.