Market turbulence is unavoidable. Many investors become spooked during periods of high volatility and begin to question their long-term investment strategies. This is especially true for new investors, who may be tempted to exit the market entirely and sit on the sidelines until it appears safe to return.
But, before you make any hasty decisions that you may come to regret later, here are some recommendations from our financial advisors on how to get through a turbulent year in the market.
What Is Market Volatility?
Volatility is a statistical measure of a market’s or security’s proclivity to rise or fall dramatically over a short period of time. It’s usually calculated as the standard deviation of an investment’s return over a set period of time.
Tips to survive through the tide
Stay invested and ride it out
If there is a golden guideline for the stock market, it is this: don’t panic and sell everything when the market loses ground or value! Remember that the economy is cyclical, and there will always be ups and downs. As a result, there will be some volatility. Even in normal market conditions, the market might drop 10% in a single year. Occasionally, the market will decline 20% at one moment but just 5% overall for the year.
When it comes to stock market volatility, the most common advice is to keep your investments in place. When stock prices look to be falling, you may be tempted to sell before they fall any more. The markets could quickly rebound, and you’ll come to regret selling your assets if their value recovers or even rises over time. The best thing to do is to just ride it out, no matter how anxious you are.
Stagger your investments
It’s impossible to say which way the stock market will go or how much it will move. As a result, the safest strategy to invest for ordinary investors is in a staggered fashion. This can be accomplished through mutual funds using the Systematic Transfer Plan (STP) or Systematic Investment Plan (SIP) approaches.
Diversify across asset classes
During a chaotic market, diversifying your investment portfolio is one of the best strategies to keep yourself calm and your overall assets stable. Diversification refers to the dispersion of your investments over several asset classes, so spreading out your risk.
Frequently, one investment sector will be experiencing a slump while another is experiencing an upswing. If you diversify your portfolio, the ups and downs will be balanced out. It also prevents you from losing a lot of money if something bad happens to one of your assets.
Take the SIP route
Another option for staggering your investments is to use a systematic investment plan (SIP). During volatile market conditions, do not cease your active SIPs. You can invest a certain amount each month in a mutual fund of your choice using SIPs. This is also automated, with funds transferred directly from your bank account to the mutual fund.
The beauty of systematic investing is that it allows you to benefit from Rupee Cost Averaging while also protecting your money from market volatility. You buy more units when the markets are down and the NAV is low, and less units when the markets are up and the NAV is high, because set sums are invested at regular periods.
Should one sell their stocks when markets are volatile?
The answer is, in general, no. Market volatility decreases over time, and prices rise. Maintaining a long-term approach during tough times can also allow you to buy more stock when it’s “on sale.” When volatility occurs, however, it may be prudent to rotate out of stocks and into more conservative investments if you require the value of your assets fairly quickly or for income to live on.
Should one buy stocks when prices fall?
Long-term investors can benefit from purchasing into a down market by lowering their rupee-cost-average and acquiring shares at reduced prices. A tumultuous market can give wonderful purchasing opportunities if you were planning to buy Rs.1000 worth of equities every month over the course of several years regardless.
We usually suggest you to invest in blue-chip companies or the ones who rank in the top 50. Because correction is not the only thing to look at while buying stock under volatility. It’s how steady the ship is, and their history in recovering.
All in all, high risk does bring in the chances of high rewards, but always be mindful of your risk appetite. To have an in depth conversation and analysis of your current investments and to plan out your new investments for the year, drop us an email on [email protected].
We are an Ahmedabad-based investment and financial advisory firm helping individuals, families and businesses in effectively and efficiently managing their finances, investment and further growing their wealth.