WHAT SHOULD YOU DO WHEN MARKETS ARE VOLATILE?
Everyone, from a rookie to a seasoned investor has one core belief : the stock market performs well in the long run. So, a common advice that you hear when you invest is that the long term game is usually safer and more profitable.
Now, imagine that you take this advice and regularly invest in the stock market every year. At 60, you want to reap these profits and dilute some of your holdings. However, the stock market is at an all time low and the growth of your stocks (i.e your return on investments) looks something like point B in this chart. Well, what do you do?
The situation described above is even more pertinent given the hit that the market has taken since the onset of the Russian attacks on Ukraine. Given the various sanctions against Russia, this has led to a lot of uncertainty in the market and consequently heavy trading of stocks which can cause a fluctuation in its price. Such a disruption in the market is called volatility and it is measured by the standard deviation of the return of an investment for a certain period of time. A behavioral approach says that substantial price changes (volatility) result from a collective change of mind by the investors. A market cannot be stable forever, every investor must expect some fluctuation in the market in the short run. For the past two years, we were experiencing a bull market despite the pandemic(thanks to easy monetary policies), so a dip in the market was just waiting to happen.
Now, if you have a lower risk appetite as per the example mentioned in the beginning, it would be wiser to stick to debt instruments as your risk appetite decreases, however if that's not the case then there is a silver lining to volatile markets. This selloff is a great opportunity to enter the market as the price of most stocks has reduced significantly. According to this report in the economic times, investors poured in a net Rs 19,705.27 crore in equity-oriented funds in the month of February which exceeded the previous month's Rs.14887.77 crore. However, a lot of the times turbulent markets seem quite risky and we realize missed opportunities in hindsight. One way around this as suggested by, Mr. Arun Kumar (FundsIndia) in this article that a pre-decided portion of your debt portfolio should be shifted into equities when the markets decline.
The bottom line is that the buy and hold strategy might not always work. As pointed out by this article, in the long term, just like missing the best 20 days can reduce your returns, so can missing the worst 20 days increase your portfolio considerably and in some cases, you may want to make trades during volatile market conditions. So it is better to stay cognizant of the market and tweak the rules once in a while to make profitable returns:)
Written By:
Nidhi Harish