Written By: Mr. Jaikishan Parmar Sr. Equity Research Analyst, Angel Broking Ltd
Volatility is an inherent aspect of the stock market. It is an inevitable phenomenon as the stock market tends to oscillate due to factors one cannot always precisely predict. The essence of a healthy long-term investment strategy is to assess the volatility aspect in an appropriate manner and emerges as a winner. To achieve these ends, specific strategies need to be devised, keeping various permutations and combinations in mind, which shall aid the investor to navigate the market’s unpredictability.
Learn to see the signs of a volatile market
The fundamental step to handling stock market volatility is to know how to spot one. Only then can you decide the right course of action to pursue. First and foremost, wide price fluctuations and heavy trading are the two principal characteristics of a volatile market.
Usually, it reflects an imbalance in trade orders. In certain scenarios, it is caused by drastic economic measures, company news, or a popular initial public offering (IPO). The early indications of a volatile market can also be assessed based on the actions of day traders, short-sellers, and institutional investors.
Refrain from investing in a volatile market
One practical approach to handle volatility is to avoid it altogether. The suggestion here is to stay put and steer clear of fluctuations when they are recognized. Low prices are not the right cue to invest in the market. There is no certainty that low-priced stocks will increase in value over time. In fact, the price may further plunge and land you in a value trap.
It is recommended that an investor analyses the stock's track record and fundamentals carefully. By taking a careful look at factors such as revenue growth, debt-to-equity ratio, and future potential, it would be easier to determine whether the stock has a history of volatility, thereby allowing us to refrain from investing in it.
Avoid rushing in and out of the market.
Another step to stand clear against the fallout of a volatile market is to time your entry and exit correctly. Due to the plethora of factors in play, perfect market timing can be a challenge even for seasoned investors. For starters, refrain from taking actions when you are in a panic mode. Do not sell your stocks out of a hurry to protect investments.
Emotion can get the better of any investor when he/she is losing money in the stock market. However, keep in mind that you do not lose a penny until you sell the stocks you hold. Until the sell-action is executed, stocks decline only on paper. Therefore, you should avoid selling stocks out of fear and making a premature exit.
A diversified portfolio can be the answer.
Diversification is not a fool proof measure, as it might not guarantee profits every time. However, it could be a plus point as it reduces the effects of volatility. With diversification, you avert the brunt of overexposure. A step in that direction will be investing in a range of mutual funds that invest in stocks, bonds, and cash-equivalents. This is being suggested so as to help you avoid being overexposed to one investment area.
Take input from your financial professional
The age-old proverb ‘haste makes waste’ applies even to the trading. It would help your prospects immensely if you are an investor with a sound appetite for well-calculated decisions. Take your time to understand the market and do not initiate hasty moves based on emotion. It is also not advisable that you act based on an industry event, without leveraging a professional's input.
A financial expert can help you assess your investment goals, risk tolerance, and financial circumstances to ensure optimal investments.
Go for different asset allocations based on your age and retirement plans.
This is something you must factor in as an investor because the younger you are, the greater the risk tolerance you can have. This is to say that depending on how old you are, your time horizon varies. That said, if you are young, you have a longer time horizon. On the other hand, if you are in your 60s, capital preservation is a priority as retirement is around the corner.
Final Note - Investors need to have a keen eye and watch out for the potential risks of a volatile market. If you have a tried-and-tested strategy, you can choose to stay invested. However, take note of the market conditions that will affect your trade during a spike in volatility. The key is to have the right strategies, preparedness for what is to come, and the ability to offset against the element of surprise.