"Markets plunged the most in two years," "Brexit spooks global markets, Sensex sheds 4 per cent," "Market carnage erodes investor wealth worth ₹1.64 lakh crore."
Have news headlines such as these forced you out of sleep only to rush to your adviser to redeem your investments? It's time to calm down and think rationally.
Unless you react to these short-term turbulence, your portfolio would remain unharmed by a day's market movement. That's because the erosion in wealth figures are valid only for that day and are notional. An investor wouldn't lose that wealth unless he trades in stocks on the day of market shock.
One pacifying exercise during market gyrations would be to make a back-of-the-envelope calculation on market movements a week after such major falls. For instance, BSE Sensex fell by 500-plus points in April 2016, following a disappointing rate cut of 0.25 per cent. Barely a few trading sessions later, the index levels were 1,000 points higher.
One pacifying exercise during market gyrations would be to make a back-of-the-envelope calculation on market movements a week after such major falls.
In the shorter run, there may be ups and downs but the blips tend to blur as you look at market movements over a longer period of time. While daily stock market charts would scare even the thick skinned, the noise reduces as you move up the time curve.
That's why halting your systematic investment plans (SIP) as a spontaneous reaction to meltdowns is not a good idea, or in your best interest.
Lows can be an opportunity
On the contrary, these spurts of volatility present an opportunity to drive home a bargain and buy more when prices are low. Consider this: If you were able to purchase 1,000 units of a mutual fund scheme in a particular month and the markets declined when your next purchase was due, you would be able to bag 1,100 units in the same amount of money when the purchase price drops.
Aside from purchasing more securities when markets plunge, there are other ways to tackle volatility head on.
Diversification is key
Splitting money into various asset classes across equity and debt instruments, including liquid assets for exigencies will help shelter you from situations when stocks or equity mutual funds need to be sold in hostile market conditions.
Follow age-appropriate asset allocation
The thumb rule goes something like this: subtract your age from 100. That is the percentage of assets you need to invest in equity, while the rest should be in debt-based products such as CDs, loans, and other fixed income products. It would be ideal to shift funds from riskier assets such as equity to a relatively stable fixed-income product to cushion your kitty from long-term adverse market cycles, especially as you near your savings goal.
It would be ideal to shift funds from riskier assets such as equity to a relatively stable fixed-income product to cushion your kitty from long-term adverse market cycles
One way to benefit from volatility is dynamic asset allocation of funds -- switching funds between debt and equity based on apt market conditions usually is the best bet. Balanced funds, too, offer a combination of equity and debt where the equity portion aims for growth and debt portion provides stability.
Monitor your portfolio
Evaluate your entire portfolio regularly and not just a part of it. You can usually soothe your nerves by reminding yourself that even though you might not have made much progress in equity during a year, your debt portfolio has been rewarding, or vice-versa.
It's a good idea to remember: Patience is the best medicine for volatility. So, take the ups and downs in your stride and invest without fear.