Volatility is one of the biggest factors which affect returns from the stock markets. Volatility is a statistical measure of the tendency of a market or security to rise or fall sharply within a short period of time.
Volatility is one of the biggest factors which affect returns from the stock markets. Volatility is a statistical measure of the tendency of a market or security to rise or fall sharply within a short period of time. Volatility tends to decline as the stock market rises and increase as the stock market falls. When volatility increases, risk increases and returns decrease. It, most times, results in burning the hard earned money of the first time investors who are unable to strategize properly during such tough times. For a new investor, the best way to handle volatility may be to manage the risk rather than trying to increase the returns. Here are three best ways to handle the market volatility.
1. Stick to the financial plan
It’s difficult to foretell what’s the right level to buy stocks. In a volatile market, this question really does not add much value. That is because it is practically impossible to catch the bottoms and the top of the market consistently. In such a scenario, all investors especially the first time ones, should stay put and stick to the already set financial plan. “When the markets are too volatile then rule-based allocation works best for you. What does that mean? Firstly, set a rule for you to shift out of asset classes. For example, if the P/E of the Nifty crosses 23X, then you can set a rule to automatically reduce your exposure to equity and transfer to debt,” Angel Broking advises.
2. Gold may a good bet
Gold is a good bet during the times when the market is volatile. The prices of yellow metal generally soar during the global turmoil, such as financial crisis. However, the prices of gold also tend to do well when equity market volatility goes above a certain level. “Your standard allocation to gold in your portfolio should be in the range of 7-10%. During times of volatility, you can look to increase your allocation to gold to better protect your portfolio value, Angel Broking says.
3. Pick quality stocks
It’s advisable to pick quality stocks and invest less in high beta names during volatile times. “High-quality stocks are less vulnerable to the volatility in the market. They have robust business models, perpetual demand for their products and have created brands that hold them in good stead in bad times. It would be a bad idea to be over-exposed to mid-caps and small caps in volatile markets as they could be the worst impacted,” Angel Broking advises further.