Author : Pratiksha Daftari
Last few years, uncertainty and unpredictability has loomed over us almost at all times with several factors affecting the market volatility. Be it Covid-19 or Russia-Ukraine war or risks of global slow down or inflationary pressures, the world faced challenges, hardly imagined before. Capital markets too, reflecting this unpredictable real economy, have remained volatile and uncertain.
With a lot of investors in India looking at parking their money with PMS houses, they should first try to understand themselves on how to make decisions on whom to select.
Let us start by understanding what a volatile stock market is.
What is a Volatile Stock Market?
In a volatile market, investors may experience significant gains or losses in a short span of time, making it a challenging environment to navigate.
Some Investors may be tempted to pull out altogether and wait until it seems safe to dive back in. While some Investors may indulge in buying and selling stocks quickly.
Need of the hour is to understand that market volatility is inevitable. It is a natural phenomenon of markets to move up and down over the short term. Trying to time the market is extremely difficult. It is also vital to have a solid understanding of the underlying factors driving volatility and to thereby have a well- thought-out investment plan that takes into account the potential risks and rewards of investing in volatile markets.
Investors struggle to navigate through such choppy markets and find it difficult to figure out how to invest in Volatile Markets. Considering this, we have jotted down 5 tips for investing during volatile markets.
5 Important Tips for Investing During Volatile Markets
1. Accept Volatility
Historically markets have had regular phases of high volatility as the economy and markets often run into hurdles. Volatility is inherent to the nature of markets and hence inevitable. While steep falls in stock prices and indices seem unpleasant, they aren’t permanent. Below table depicts the steep drawdown seen in Nifty 50 over its 30+ year journey
2. Use it to your advantage
Volatility at times provides opportunities that investors can take advantage of. Investors who are thorough about fundamentals of businesses and its valuation can use this temporary mispricing to accumulate stocks at alluring prices. In fact, some of the best performing stocks of last decade such as Titan, Eicher Motors, Britannia etc have seen multiple instances of double digit drawdowns. Marquee investors have only used these drawdowns to increase their positions and maximise their returns.
3. Cut through the noise
As humans, we are constantly under the influence of our cognitive biases that have an impact on our beliefs and sway our judgement. This holds true for investment decisions as well. When it comes to investments, the pain of temporary losses in challenging markets, even if unrealised, can hurt far more than the joy of having outperformed markets earlier. This phenomenon of loss aversion can influence investors to book losses in investments that are worthy of hold.
Volatility in the markets often creates an aura of uncertainty that shoo away investors who find it difficult to manage ambiguous situations. While some amount of risk is part of the game for investors to enhance their returns, in turbulent times, most investors choose to sit at side-lines rather than exploit the market opportunity available.
As a prudent investor, it is important to be aware of these biases and take a cognizant approach to decision making.
4. Focus on time in the markets and not timing the market
Many times, investors go greedy and churn in and out of stocks with conviction that they will be able to call out market peaks and bottoms. While this may seem logical and hence alluring strategy, timing markets is an exceptionally difficult and thereby a futile exercise. Historically, for good companies, drop in stock prices is not perpetual and hence in the long run, staying invested has yielded better returns for investors. Market participants with a long horizon and disciplined investing approach tend to eventually enjoy good returns.
5. Diversify your investments
Investors can use diversification to their advantage to reduce the blow of volatility in particular asset classes. Having a holistic approach to investing with appropriate allocation to stable asset classes could help. For example, while debt markets are less prone to volatility gold tends to benefit in times of economic uncertainty. Within equities as well it would benefit the investor to spread investments across multiple companies across varied sectors.
Thus, it is important to take note of these factors, and even when investing with a Portfolio management service, investors must try to base the selection decision of the manager on the investment process rather than performance numbers. What defines the success of a PMS in the long run is the discipline and process and historically the best fund managers are the ones who do not deviate from their discipline no matter what.