Markets have been quite volatile in recent times, but instead of seeing it as an adversity, volatility should be seen as an investor’s best friend.
The stock market has responded to the COVID-19 pandemic with worrying volatility. Markets have been quite volatile in recent times, but instead of seeing it as an adversity, volatility should be seen as an investor’s best friend. While investors tend to stay cautious in the market during these days, they must appreciate that such market corrections also give them an opportunity to invest at better valuations. Stock prices are responding to various developments on COVID-19 and economic packages introduced by governments. As the situation unfolds and we learn more about the impact of the pandemic on the global economy, it is certain that businesses will be facing difficult times ahead.
Investment tips and advice to choose the right Investment Mix and get the best out of the current stock market volatility are as following:
Diversify your investments
While most of the investors have faced the brunt of volatility, those with well-diversified portfolios have managed to minimize their losses. When you diversify your investments, you must try to invest in securities that have no correlation with each other. That means even if one security falls, it does not impact the returns of other investments in your portfolio.
This is highly relevant in the current scenario as some areas are worse affected than the others. Hence, try to look for sectors which are strong and will recover quickly and might even make good profits once the economy turns better.
Studies for a long time have been highlighting the importance of asset allocation for long-term portfolio performance. Given the uncertainties which have surrounded the market, it is advisable that you invest in debt and equity, rather than equity alone. Two-in-one approach should be followed in financial markets through investing in equity and debt market proportionately, as this allows such funds to perform well in all market conditions.
In an expansionary economy,the equity market usually tends to perform well, while in a contracting economy debt market tends to perform well. As such, having a mix of both equity as well as debt can help mitigate the investment risk to a large extent and can help sustain during volatile times. The right balance of both the asset classes is a strike by investors – equity for long-term wealth creation and debt for stable and consistent returns.
Asset allocation helps to generate healthy risk-adjusted returns by allocating funds, stocks, bonds and gold by taking into account one’s financial goals, risk tolerance and investment horizon.
Invest For A Longer Horizon
Volatile markets are dangerous for short-term investors. If you look at the past performance of the markets, you will see that while markets have always been volatile, they have recovered from crashes and huge correction phases. While the past performance is not a guarantee of the future performance, the inherent nature of the economy and markets is to bounce back.
During a pandemic, markets can take some time to recover and perform in your favour. Therefore, a long-term investment strategy would be your best bet now.
(By Palka Chopra, Senior Vice President, Master Capital Services)