Market ups and downs are going to take place and it is difficult to escape from them. Thus, the only way to deal with them is by researching and strategizing along with aligning your goals and risks, to make the most of your investments.
What is Market Volatility?
With reference to stock markets, market volatility refers to the magnitude and speed with which the price of stocks and other assets changes. Higher volatility means quicker swings and vice versa.
It must be noted that market volatility can take place in any financial market and for any asset like stocks, bonds, real estate and other instruments of money markets.
Volatility happens due to various reasons like economic changes, political events, global factors and other unexpected circumstances. The underlying factor behind market volatility is uncertainty.
Through this blog, let’s discuss some of the measures that you can follow to deal with market volatility-
1. Ensure that your Portfolio is Well-Diversified -
A well-diversified portfolio is a saviour in times of market volatility. You will not feel the drop in a particular sector or an individual stock, mutual fund, bond or any other asset if your investments are spread across various sectors and schemes.
Smart asset allocation is extremely vital when it comes to making investments. The necessity of diversification in the world of investing today is an age-old concept. The major method for adjusting the market risk of one's investment portfolio can be proper diversification.
2. Never abandon your Financial Plan
The basic idea is to follow your financial plan under all circumstances. If it requires some review, it is fine to do so but abandoning it entirely makes little sense. There will be times when volatility will spike considerably high but it is essential to remember that your long-term goals and journey to wealth creation is completely based on your financial plan.
The entire purpose of having a financial plan gets diluted if one does not stick to it. Market volatility will come and go but this should not affect the consistency of investments. But of course you have to keep coming back to re-assess your plan so you know your plan is valid still and will take you through to your goals aligned.
For example - If you are investing in SIPs, rupee-cost-averaging and power of compounding will do wonders for you in the long run. But if you stop investing and start withdrawing money from your investments solely because the market is volatile, it will do you more harm than good. Hence, never make emotional investing decisions and follow your financial plan.
3. Have Realistic Goals and Right Mindset
Most of the times people feel that their investments are not fetching them high returns or are not growing at a fast pace. The actual scenario is that they have unrealistic expectations from investments. Patience is key when it comes to investing and making emotional decisions is the last thing one should do.
As a matter of fact, the equity asset class exhibits high volatility and hence one should invest in it for the long term. However financial history demonstrates that over a long period of time, the equities asset class has provided one of the better returns.
The stock market's short-term volatility is one of the reasons why the majority of people are afraid to invest in it. Investors should realise that volatility is the stock market's defining characteristic. It takes skill to manoeuvre through market instability.
4. Buy the Dip
A popular way to increase returns through your investment in an index, or stock that you are very confident in is to "Buy the Dip."
We cannot emphasise on the importance of investing more when the stock market is witnessing a lower trend. It is called “Buy the Dip”. One should use the volatility to their advantage by investing more. Of course this applies to well researched stocks.
5. Do Nothing
Typically, traders think that there are only two trading tactics to master: knowing when to buy and when to sell. There is a third tactic, which is knowing when to do nothing.
The fundamental guideline is to avoid the market if you do not comprehend its underlying dynamics. Staying outside at the appropriate time and doing nothing is also a strategy in unpredictable markets.
Conclusion
Volatility is bound to occur and thus you must be careful, not to time the market. Even the most knowledgeable financial experts and cutting-edge financial technologies cannot reliably forecast what will happen in the short term. It's crucial to make long-term investments.
The meaning of short-term variations is meaningless when we have a long-term horizon. We must allow investments time to develop.
On a brighter note, market volatility can be beneficial for long-term investors as they rupee-cost-average their investments. This means that because they contribute regularly to their investment accounts, it allows them to hedge their risk by buying stocks or mutual funds at both the highs and lows. In this way, the returns become smooth and the losses are averaged.