Volatility can be simply defined as the relative rate at which the price of a security moves up and down. Well, this up and down movement is now causing us the anxiety.

The Sensex is down 12% from the beginning of the year and down 5.7% from the beginning of this month.

Ben Graham in his book The Intelligent Investor introduced a term ? Mr Market ? that shows up every day to either buy from you or sell to you. However, the increasing questions we are asking ourselves and our advisors is, should I buy today or continue to hold on to cash? Are equities the best bet or commodities (the way silver jumped from R43,000 per kg to R74,000 per kg in a matter 10 weeks and the fall to R52,000 a kg in a matter of four days)? What if I invest in bank fixed deposits and forget about it for the time being? But one must remember that if you are in 30% tax bracket, the return post-tax will be lower.

The more depressive ?Mr Market? is, the more the opportunities available to you as an investor. You could find irrationally low prices attached to solid businesses. Volatility is your friend. It creates opportunities to buy stocks that are significantly undervalued. An undervalued stock means you have a larger margin of safety. The first thing one needs to understand is that price is what determines the profit. The maximum a price a share can fall to is zero. When Satyam Computer Services had fallen to R6 in January 2009, how many among us jumped in to buy at that price? One can put forth multiple reasons: scam-tainted, uncertain future, inept management. However, one thing we failed to consider was that Satyam as an institution had a strong and large workforce, which cannot disappear overnight. It still will have to service its existing clients and, moreover, this being a marquee company, the government and private sector could come together and keep it afloat.

Those who took this educated call to buy at the single-digit price laughed all the way to the bank as the stock at present has risen more than 13 times the January 2009 price. This was an extreme case and in behavioural finance, we can term this as an hindsight bias.

It is not always easy to maintain our confidence when markets become volatile. Conventional wisdom teaches us that volatility is risky. During the period of volatility, we find that the existing holdings are in the red. We want to avoid the negative rate of return during the holding period. But an investor must understand that Rome was not built in a day and the same applies to your wealth. If over a period of three years the existing investment is able to generate an annualised return exceeding the inflation rate or 12%, it is not a bad investment. Do not go red in the face looking at just one-week or three-month return data.

Strategies during volatility

When in doubt, don?t buy. Stay in cash. Cash is king. If you cannot digest the volatility, invest the surplus in liquid or liquid-plus funds that would give a return exceeding 6-7 %. At every dip of, say 5-10%, start investing 5-10% of the allocatable surplus in equities. If the risk appetite is slightly higher, one could invest the surplus in liquid debt funds and through the systematic transfer plan (STP), enter equities. This, while providing insulation against a sudden fall in price, allows one to enter into equity holdings through the value averaging concept.

One can also look at three- to six-months fixed maturity plans for those who would want a fixed deposit plus kind of a return and also not lock in money for a longer duration.

For those with patience, the jungle can teach a lesson or two. One need to watch the prey (in this case the indices) and when you are sure that the price has come to your level, go for concentrated buys (diversification is a must, but not at the cost of concentration of acquisition).

Patience and the ability to take informed and calculated risks is the way forward. And as always, the basic rules seldom change: Asset allocation (in line with your risk profile) and portfolio rebalancing in line with the time horizon and rules.

The writer is founder and managing partner, Zeus WealthWays LLP