Investing In Uncertain Times

It is in the very nature of stock markets to be whimsical. Sharp price movements in short periods of time, or stocks trading way below or way above their fundamental value for extended periods of time are a hallmark of equity markets. Markets comprise thousands of stocks representing multiple sectors and industries. These stocks are influenced by a host of macro-economic and micro factors that change frequently. Additionally, there is the human bias factor which can have a disproportionate impact on stock prices. All these factors together create a lot of uncertainty in the markets, making equity investments a high risk proposition.

At the same time, there is no disputing the fact that equity investments can be fairly profitable for the long-term investor. Instead of being worried about uncertainty, it is better to be prepared. A well-defined investing plan that successfully captures your risk and return requirements can help you weather the normal ups and downs of the market. Additionally, it will also keep you well positioned to capitalise upon intermittent opportunities.

Ignore the noise 

On a daily basis there is a host of news flows, macroeconomic updates and company developments that can lend uncertainty to the stock price. Often, investors can have knee-jerk reactions to uncertainty, causing them to make sub-optimal investment decisions. These can frequently lead to huge losses as well. It is important to ignore the noise, focus on developments that are likely to have an enduring impact on your investment and then make judicious investment decisions.

Stay focussed on the long-term  

It is important to remember that stock markets are cyclical in nature and that in shorter time periods, can also be highly irrational. Uncertainty is a constant companion, and downturns can happen frequently. However, most market setbacks have typically been followed by recoveries, giving the patient and long-term investor an opportunity to reap profits. Thus, it is important to stay invested for the long-term to realise the true potential of your investments.

Maintain diversified portfolios  

One of the best things that you can do to mitigate the impact of volatility is to build a diversified portfolio, intelligently spread across asset classes. It is well known that within the investable universe, there are various asset classes that have little to negative correlation with each other. What this means is varying certain markets conditions have a bigger impact on certain asset classes while the others can remain relatively insulated from the same. A well-diversified portfolio will ensure that sharp movements in any one asset class do not have a disproportionate impact on the overall portfolio.

Stay disciplined  

Sit with your financial advisor and create a well-defined financial plan that can ably take care of your risk and return requirements. More importantly, stay disciplined and follow your investment strategy without succumbing to uncertainty induced fear and biases.

So, the next time you pick up the newspaper and read about geopolitical tensions, trade war concerns, growth naysayers and currency woes, do not panic and second guess your equity investments. Instead, embrace this uncertainty, look for investment compelling opportunities and stay tethered to your portfolio strategy.