Proper strategy helps you overcome a sudden onslaught of volatility, the byproduct of unexpected events
While 2020 has been declared universally as “spilled-milk-on-New-Year’s-resolution”, even more so, the financial goals of many were affected drastically. Whether it is a war or pandemic, it is something that every investor wants to avoid. However, with proper strategies, it is possible to overcome the sudden onslaught of volatility that is the by-product of unexpected events.
The stock market is said to be the barometer of the economy. Whether it is good news or bad, markets have a tendency to react in an aggressive manner. They trade on factors that are nearly impossible to quantify. 2020 was a classic example of the ultra-sensitive nature of markets, where they tanked nearly 37% on fears for the pandemic, and surged nearly 100% from lows at the hint of vaccine development.
Here are some strategies that can help you tide over the reckless nature of markets.
The first mistake that an investor makes is to time the market. Do not redeem your investment, because markets witness extreme volatility. Reacting to every twist and turn of the market can be a bad idea for your finances. It is easy to withdraw money from investments and enjoy the freedom to spend, but what about when you want the financial freedom of not worrying about your future? If you are investing for certain goals, you must continue to invest in a staggered manner, regardless of market levels.
Many times, the temptation to withdraw money is huge. As soon as the urge to withdraw takes over, go for reallocation. This will help you to keep your impulses in check and also help you to diversify your portfolio. Time and again it has been proved that a well-diversified portfolio safeguards wealth during trying times. However, buying a multitude of equity funds is not diversification. Diversification could prove to be a double-edged sword if one is under-diversified or over-diversified. A well-diversified portfolio is the one which has exposure to various asset classes.
Trying times demand reassessment of one's goals. This is the reason reallocation is extremely important. The purpose of realignment is to help you assess the risk and realign your portfolio to meet your risk tolerance. Remember, the purpose of reallocation is not to maximize returns; it is to safeguard your portfolio. For example, during volatility you can shift from equity to debt and vice versa.
Every investor must maintain a buffer cash balance which can be deployed during extreme volatility. It will also help to meet emergencies in the event of unforeseen circumstances. As mentioned, markets have a tendency to engage in reckless behaviour, and having a cash buffer could protect your portfolio from irrational decisions. Financial advisors generally advise maintaining an emergency fund that can take care of six months’ expenses.
One of the best things that can make or break your financial plan is investing without assessing your risk tolerance. Risk tolerance can change with age or with circumstances. It is important to assess one's risk tolerance periodically, especially one's systemic risk, inflation risk and market risk. If the concept of risk tolerance appears too complex, you can seek advice from a professional financial planner. This can help you understand your strengths and weaknesses. For example, if you need money within a year you should invest in value funds or debt instruments, but if you can hold up for ten years even if the market tanks today, you should invest aggressively in equity funds. Risk tolerance is about performing a SWOT analysis of your investment personality.
The markets have matured a lot. A 10 per cent drop is normal and should not cause panic in investors’ minds. There is no pandemic-proof strategy. Whatever your investment strategy, it must steer you towards your financial goals. Your goal as an investor should be to build a solid narrative in uncertain times that could lay the foundation for a solid financial future.
Finally, invest. Invest. Invest. If you are uncomfortable investing in one go, invest in a staggered manner. Even recession has a bull market, and bull markets can witness brief meltdowns. Investing in a staggered manner helps you to take advantage of rupee cost averaging. Markets, in the long run, have a tendency to go up because of constant human innovations and also for the fact that newer and better managed companies continually replace worn out ones. Inflation is the biggest threat to the money lying idle in the savings account.
The author is Founder, Investonline.in
DISCLAIMER: Views expressed are the author's own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.