Market volatility is a frightening situation for many investors where they find themselves treading on thin ice. That moment makes them contemplate making a quick exit. It may feel like being stuck on a financial roller coaster of sorts, especially for new investors.
What is Market Volatility?
Risks and uncertainty are some of the terms used to define volatility. In stock market terms, volatility is the uncertainty associated with the rate at which the price of securities may fall or rise for a given set of returns. One of the best measures of volatility is called Standard Deviation. It depicts the amount of variance of the market from the expected standard.
For example, NSE’s NIFTY 50 (Indian stock market index representing the weighted average of 50 of the largest Indian companies listed on NSE) can have a standard deviation of 10%. But a fixed deposit will have zero deviation, as the returns from the same never vary.
Why do stock markets experience such high volatility?
The reason is unbalanced trading, which results from uneven buy and sells orders from different investors. There are various other factors at play, including IPOs, rumours about a company or other such important news, buy/sell recommendations from experienced and well-known stock market analysts, changes in economic policies, thematic investing, and many more. The coronavirus pandemic has been one reason why stock markets worldwide experienced extreme volatility due to fears propelled by investor sentiments.
Why Does it Matter for Investors?
Frequent ups and downs inherently mark stock markets in the short term, and any sudden moves can easily wipe out previous gains. Often such rash decisions can have a serious bearing on your long-term investment planning and leave you feeling confused. This is why every stock market investor should have a sound knowledge of how to invest during times of market volatility and certain tips and tricks on how to build lasting wealth, even when the markets show fluctuations.
Here are some tips on handling volatility:
Diversification is the staple of investing in stock markets. Always think of building an investment portfolio that consists of a diverse mix of stocks, bonds, securities, etc., as diversification hedges your market-related risks significantly.
Why is that? It’s because even if some industries do not perform well, your portfolio is adjusted against severe losses by the industries or stocks that perform well. Some potential diversification strategies could be choosing stocks from various sectors of different sizes or even belonging to different geographical locations.
Taking cues from the recent COVID-19, the pandemic affected a few industries or regions more than the others, thus giving better leverage to investors whose portfolio was spread across industries. This tip will also help you in thematic investments.
Rebalancing & Readymade Portfolio
Just like your other asset classes require maintenance, your investment portfolio needs to be maintained regularly as well, which is also called the process of rebalancing. This involves selling some stocks and buying some bonds, a process that you can undertake multiple times until you reach a stock mix that matches your risk-taking ability.
In times of market volatility, rebalancing your portfolio can be a profitable investment strategy, which you can do instead of making any sudden moves. You can add to positions that have been declining, which is the same as buying assets on sale.
Another strategy in the face of market volatility could be choosing to invest in readymade portfolios, which are tuned to cater to market ups and downs. These readymade portfolios already follow a thematic investing trend and thus, avert any significant risks. Stoxbox gives investors varied stock options to choose from.
Play the Long Game
One important rule to remember as a stock market investor is that what goes down will bounce back up. So even if you encounter a dip in the markets and your investments seem to be at an all-time low, try to stick to your game and hang in there.
Suppose you are saving up for retirement at the age of 45. You mostly have a couple of decades to go, and pulling out your investments due to frequent dips can lead to long-term erosion of wealth. Ensure you are still on track by sticking to your goals, strategy, and investment time frame.
Consider Defensive Assets
Parking money in defensive assets can be an exciting strategy to withstand volatile markets. This involves looking for opportunities to invest in stocks of valuable companies at discounted prices, which can help you wade through uncertain times. By doing this, you are ensuring that your portfolio does not end up going downhill, and you can withstand unpredictable market changes with relative ease.
For example, investments in stocks of FMCG companies and blue-chip stocks are always a good option as these stocks have an added competitive advantage over their counterparts. Such companies are likely to continue doing good business even in times of a bad economy.
SIPs, or systematic investment planning as we call it, are a good bet to take during times of market volatility. Since SIPs do not put a dent in your pocket, unlike the lump-sum manner of investing, they can be opted for even in unstable market situations. SIPs require a disciplined manner of investing, which entails sticking to your guns in good times and bad, making minimal investments, and walking out with a considerable sum at the end of a particular period.
Reinvest Salary for Greater Income
While market volatility may not be something that we can control because of larger forces at play, we can control how we prepare ourselves to weather times of uncertainty. Investing a certain solid percentage out of your salary can be a great way to build your income as you are enabling your money to earn more money by way of investments.
Avoid Value Traps
If you invested in stock because of its low prices, which further kept getting lower and lower, chances are you caught yourself in a value trap. The stock markets come with no guarantees, so if you invested in a low-priced stock only to make money on it once it regains, there might be chances of the same never happening at all.
Instead, it is advisable to analyse the fundamentals such as revenue growth, debt-equity ratio, price-earnings ratio, profit margin, etc. Before going ahead with the investment, it can be an indicator of their future potential. It is always advisable to practice thematic investing while playing for long-term investment plans.
Stock market volatility as a concept has been around since the times stock markets came into existence. While the above tips should serve you well to face it, the biggest risk you could take is not taking any risk at all.
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