An investor looking to control portfolio losses in volatile situations must adhere to the thumb-rules and not indulge in risky bets.
The past month has been no less than a rollercoaster ride for the Indian equities with India VIX touching levels of 20 which is quite high. The Nifty experienced a massive fall from the highs of 11,741 in September which eroded a lot of investor wealth and created a panic- like situation which further encouraged the selling of stocks. However, investors must always remember one thing that “Premature selling of stocks is just as bad as holding shares which are depreciating in value for a long time.” It is at such volatile times in the stock market that an investor must maintain caution instead of panic selling or following the herd. Here are 5 key things investors should not do when the markets are wild:
1. Don’t trade looking at international markets
For short durations, there are periods of high correlation between the domestic and international markets. But during majority of times, statistically, no such correlation exists. Each economy has its own economic cycle of growth, maturity and decline. Moreover, each economy has its own demographic anatomy and stock prices reflect them unbiasedly. India has its own set of unique economic realities which are reflected by our stock markets. Thus, blindly betting on international markets and then taking decision is a losing proposition.
2. Avoid news-based trading
Traders should beware as ‘sudden breaking news’ can cause a knee-jerk reaction in the stock price which can cause substantial losses. Also, certain news is not authentic or might be from uncertain sources which can impact the stock substantially. Such an impact is often very short-lived and as soon as the euphoria/panic is over, the stock price will rebound like a ping-pong ball. Hence, traders must stay away from news.
3. Don’t get carried away by media consensus
Media headlines seem very convincing at first glance, however, “All that glitters are not gold”. The same logic applies to the stock market as well. If all investors are bullish/bearish on a stock doesn’t mean they are correct. Each person’s risk appetite, liquidity needs, return requirements etc. vary. Investors must independently and rationally apply their own mind and look for quality stocks which suit their own needs and demands instead of blindly following media headlines.
4. Don’t indulge in leverage positions
Market volatility is extremely harmful for traders/investors who take leveraged positions. The short-term uncertainty of the direction in the stock can translate into a huge loss. A knee-jerk reaction can automatically square-off an investor’s position in case of the circuit being hit. To prevent such situations, leveraged positions must be avoided. Nonetheless leverage can yield high returns but also lead to big losses.
5. Don’t square-off the crown jewels in your portfolio
Panics play with an investor’s mind by making even a sound investor sell his shares. But these panic-like situations don’t last for long and eventually the stock continues its predetermined path. Hence, selling your quality stocks during such panics and forgoing on the future potential gains is more loss-making as the same stock if held for longer is bound to recover and help make good returns albeit the quality and fundamentals remain intact.
An investor looking to control portfolio losses in volatile situations must adhere to these thumb-rules and not indulge in risky bets. Greed takes over fear in certain situations which is equally damaging. Traders must always place appropriate stop-losses as calculated risks and a margin of safety are extremely essential in the trading world. Only when investors play safe and smart in uncertain volatile situations, can they safeguard their portfolio and prevent it from undergoing irrational risks which are under human control.
(By Jimeet Modi, Founder & CEO of SAMCO Securities. The views expressed herein are his own.)