Volatility has gripped Indian equity markets owing to reasons such as increase in the number of coronavirus cases in the country, oil prices and supply concerns, growth and liquidity concerns, moratorium on struggling Yes Bank, etc. Volatility is one of the main reasons why investors sell their stocks at the wrong time. It is quite natural that an investor wishes to sell in times of uncertainty to avoid the risk of further loss and that often prompts to make rash decisions. Let us discuss below what are the investment strategies one should follow in a volatile market.
Hold tight on your position
There is no merit in selling your shares during bear market, and in fact, by doing so it could cost you in the long run. If you already have significant shares in your portfolio, hold tight. By holding most of your current stock positions, there is a higher probability that you will benefit from a market upturn. You can link savings accounts to your brokerage account, and transfer funds whenever a buying opportunity in the market arises. You also should keep in mind that market downturns almost always open up new opportunities. These could be in areas of the market that were perhaps overlooked or overvalued before the downturn began.
Avoid ostrich behaviour
It is difficult not to panic when the stock market takes a nosedive. Often, many investors during extreme volatility, over-react and bail out of the market altogether, or they engage in what is known as ostrich effect / behaviour which means tendency to avoid negative financial information and do nothing. While both reactions are understandable, neither one is going to help you make progress toward your long-term goals, It is worth keeping in mind that volatility can open up new growth opportunities as some investments become more reasonably priced.
Invest in dividend aristocrats
It is always advisable to invest in high dividend paying stocks. Even though the price of the underlying shares might fall, but still you are earning steady dividend income and that might stabilise the price in the long run. Investors are naturally drawn to the reliability of dividend income, which can serve to minimise stock price declines. Regularly rising dividend pay-out ratio over a period of time is the result of steady increases in net earnings. This is a clear signal that the fundamentals of the company are strong which shows in their long-term performance.
Pick value stocks
Value stock picking strategy is empirically proven as one of the most successful ways to invest in the market. The basic idea is to identify stocks that represent bargains. This is usually because such companies are out-of-favour with the general investing public. They are considered to be undervalued based on certain basic metrics such as lower P/E ratio than their industry average, lower price to book ratio and the like. Attractive equity market valuations are often coupled with periods of market uncertainty and turbulence.
Keep a well-diversified portfolio
One important thing you should ensure is that your portfolio is sufficiently diversified. Having a broad mix of investments—equity shares across sectors, corporate and government bonds and other asset classes definitely help you to weather volatility.
To conclude, as an investor you should be aware of risk during times of volatility, but do not panic and most importantly avoid making decisions out of fear. Remember that an unsteady market may be a result of certain economic events, and may not be for the long term.
The writer is a professor of finance & accounting, IIM Tiruchirappalli