Market volatility, no matter how undesirable it seems, is a reality every investor needs to get acclimatised to.
A tightly interconnected world sees a dozen developments on a daily basis, and the sensitive markets are mostly quick to react to them. Market volatility, no matter how undesirable it seems, is a reality every investor needs to get acclimatised to.
The peaking Indo-Pak tensions, the ongoing US-China trade wars, the Brexit conundrum—they all have had and will continue to have a direct impact on the stock markets. But the smart investor need not get as responsive to these uncertainties as the rollercoaster stock market trends. Plus, there are a number of things you can do to fortify the walls surrounding your investments to make them immune to unavoidable geopolitical turbulence.
Here are some tips to keep your investments afloat during tumultuous times.
A panic-stricken and rumour-laced investment decision is possibly your worst bet when tackling a volatile market. Panic clouds analytical thinking and forces us to make rash decisions—like hastily liquidating the investments when facing volatility, only to regret when the markets recover later. Remember, skyrocketing inflation, snowballing public debt and growing taxes are some of the obvious results of a worst-case scenario like a conflict, all of which can eat away the value of cash deposits.
It’s a fact that you cannot control external influences on the stock market, but you can check the quality of the information you consume in order to avoid panic. So, don’t believe in hearsay, to begin with, and verify the credibility of the news before reacting to it. Having said that, holding your ground during volatile times may be harder than you thought it would be, especially when it’s almost impossible to ascertain the scope and extent of their impact on your investments. So, how to decide on your future course of action?
Look at your financial goals
Your financial goals, which form the foundation of your investments, should be the torchlight to guide you through uncertain times. They should be the only thing you should fall back on to decide whether to remain invested or to pull out.
If you’re near your financial goal, like you’re just a month away from your 5-year mutual fund investment maturity, you may consider redemption to save yourself from near-term volatility. Inversely, if the maturity deadline is still a couple of years down the line, stay put and continue investing so that you give your investments maximum time to recover. Tried-and-tested strategies like rupee cost averaging (read Systematic Investment Plans), where you invest a fixed sum at regular intervals to minimise the risk impact of a choppy market, are helpful.
Diversify your investments
The other go-to plan should be to diversify your investments into various asset classes in order to offset combined risk. This will ensure your losses in a particularly risky investment will get compensated for by the gains you make in another less lucrative but safer investment.
As such, allocating a portion of your assets, based on your financial goals, to fixed income instruments like Public Provident Fund or National Savings Certificates apart from equity-linked investments can be a safe strategy. Also, gold has been considered a traditional hedge against inflation and becomes a popular—at times “automatic” —investment choice during volatile times. While there’s merit in these arguments, you’d probably do well not to get overboard with gold investments, especially when you consider the fact that the prices have remained more-or-less steady in recent years. You may want to allocate not more than 5% of your total portfolio to gold investments.
Avoid rebalancing in a huff
Your exposure to debt instruments may increase when equity markets nosedive in reaction to a global turmoil. Do not rush into rebalancing your portfolio by switching money from debt to equity products or channelling more funds to equity instruments without thinking it through, as you cannot be certain when the markets will recover. Instead, wait for the markets to improve and then take a call. Protection of your investment capital is the foremost consideration during trying times, but a savvy investor shouldn’t go overboard with rash decisions.
-The author is CEO, BankBazaar.com