Handling Volatility in Markets

“There is Nothing Certain, But the Uncertain.” 

We are now used to surprises and uncertainties. In the context of the ongoing war, we believe everyone is deeply pained by the tragedy unfolding before us and the loss of human lives. We will try and keep emotions aside as we speak of the subject today.

The truth is, we all are today ready to accept and adapt to a crisis better than ever. This has come at the cost of our personal experience during the pandemic. It has made us stronger. The recent events though have started reflecting on the equity markets and our portfolios. While the volatility of the markets is nothing new, the real question is, how are we reacting to such volatility in markets? 

Generally speaking, markets won’t be considered as volatile unless there are movements, rise & fall, of over 1% over a sustained amount of time. Once clarity and sanity return, the markets would tend to stabilise at higher or lower levels, reflecting upon the new realities. Sharp market movements are often caused by economic news, interest rate changes, fiscal policy changes, governance uncertainty and so on. Events like war, pandemics, civil riots, climate crisis, etc, which were supposed to be rare, have a direct impact on markets, either small or big. 

“Uncertainty is actually a friend of the buyer of long-term values.” - Warren Buffett. Uncertainty can be good or bad, a friend or an enemy, depending on how you manage and make decisions. Here are a few things we would expect wise and experienced equity investors to do when faced with uncertainty. 

Don’t Panic. Don’t React. 

Most investors feel like reacting in response to some sudden market movement, usually a correction /fall. The important thing to note is that there is no need to react in response to an event, even less any reason to panic. No amount of stress or panic or reaction will make things better for you. Worse, it may only lead to wrong decisions. 

It has happened before & will happen again. 

As of now, we are clear, uncertainty is an essential part of investing. No investor should invest in equities if he/she does not have the stomach for handling volatility and corrections in the portfolio. Old investors would know that there have been multiple occasions and events when markets saw big and small corrections. There will be many more in the coming decades too, especially on the global geopolitical front. These will impact trade and relations between countries and the domestic economy as well. As investors, we should be ready for uncertainty.

Go back to basics.

At times of uncertainty, it's always better to go back to basics. In case of sharp portfolio changes, whether on the upside or downside, it is always better to check your asset allocation and reallocate resources accordingly. If the equity portion has fallen, then probably you can shift some from debt to equity and vice versa. Your defined asset allocation can also be changed to take advantage of any extreme market levels. Getting back to basics will answer your question - what should I do? 

Diversify as per risk profile 

A diversified portfolio with appropriate asset class level diversification between equity and debt is always recommended. Within each asset class, further diversification is also recommended in the kind of schemes you hold. There are large-caps, flex-caps, mid-caps, theme-oriented funds and so on. The right mix is welcome and will insulate your portfolio from specific risks to select types of companies /market segments. Within debt too, there is a lot of scope for diversification.

Opportunity in Crisis

Almost every time there is a crisis, an opportunity lies somewhere. The idea to make good of an opportunity is purely a non-emotional one and surely no one is hoping for a crisis to occur. But since it does occur and there is nothing we can do about it, making use of the crisis for your benefit is the right thing to do. Almost every big fall is like a discount sale happening on the market where you can add fresh money or move money from debt to equity. Such opportunities are rare and short-lived, so it's always better to be proactive and consult your experts before making any decisions.

Don’t do anything when in doubt

To be calm and have patience and not do anything in face of a crisis is one of the good virtues of a wise investor. It's always better to not react and do anything which would be repented later. Know that any fall in your portfolio is only temporary and notional in nature and selling will only make it real and permanent. Unless there is a real, unavoidable reason to sell, there is no need to get out. As investors, you can also explore other options of financing like loans against securities or mutual funds that will ensure that no loss is made, and your financial needs are met too.

Reach out for help

We strongly believe that a sustained long-term wealth creation journey requires a helping hand. A financial products distributor or an expert is strongly recommended. The primary role of such a person is to handhold clients to navigate through the challenges and mould the financial behaviour. Reach out to your mutual fund agent, expert or advisor to guide you from time to time and during such periods of uncertainty. 

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