Five things to know about investing in a volatile market

Volatile markets present opportunities for immense gain as well as a high risk of losses.

 Volatile markets are tricky.

They present opportunities for immense gain as well as the highest risk of losses. Their unpredictability is what makes even the most seasoned traders cautious about maneuvering them successfully.

Typically, a volatile market triggers loss both on the short side as well as the long side. As stocks rapidly lose value, the VIX/fear ratio shoots up, and the indices plunge. However, it also brings with it an increased opportunity to earn profit in a short amount of time.

While having an investment plan and sticking through it is likely to help you achieve your financial goals, it could go astray in a volatile market. In such a situation, it is natural to lose confidence as an investor.

However, instead of losing your mind, here’s what you can do to sail through a volatile market:

1. Stay invested and avoid panic selling: Often, new investors resort to panic selling when stocks lose value. However, most market experts agree that this is hardly ever the right move. When you exit prematurely, you lose out the opportunity to cash on the long-term potential of a stock. Instead of selling in a hurry, it is advisable to analyze and rebalance your portfolio. Stick to stocks that are winners and dilute holdings that may be vulnerable or least likely to recover. Evaluate your risk tolerance and prepare ahead. While the lull in the market could be the best time to weed out laggards from your portfolio, doing so in fear could do more harm than good.

2. Stick to your SIP: Diluting your SIPs in a volatile market may seem to be a ‘quick fix’. However, market analysts  advise you to do just the opposite. Continuing your SIP in a bearish market means that your portfolio accumulates more units, thereby bringing down your overall cost of acquiring them. If you have surplus funds, a steady flow of income, and a strong emergency fund at hand, now could be a good time to increase the amount of your SIP. Consider pausing your investments or redeeming them only if you expect your income to come to a halt or foresee a radical change in your financial situation in the near future.

3. Invest in high-dividend stocks: Often, high-dividend stocks are considered boring. However, you may want to consider them to negate the effects of a volatile market. After the NIFTY crashed at the beginning of the Covid-19 pandemic, fund managers lined up to buy shares of companies with a relatively low risk and high dividend yield capacity. The focus was on public sector undertakings and private companies with a dominant market share. Investing in high-dividend stocks could thus be considered as a protective move in a volatile market. However, contrary to this, some companies may reduce their dividend payouts or even stop it altogether owing to the economic recession. It is thus advisable to invest in stocks that have provided a steady capital appreciation in the recent past.

4. Diversify your investments: While most investors have faced the blow of the pandemic, those with well-diversified investments have managed to evade its impact to a great extent. It is indeed unwise to put all your eggs in the same basket, and more so in a volatile market. A diversification strategy helps reduce risk as not all stocks or financial instruments react the same way to changing economic or market conditions. Market experts  suggest spreading investments across asset categories such as stocks, bonds, and cash. However, it is advisable to do so with caution without going overboard with diversification.

5. Avoid impulse buying at lows and avoid leveraged bets: It could be tempting to buy stocks in a volatile market due to their low prices. However, in the absence of a well-calculated strategy, this may prove to be a value trap. It is important to look at a company’s track record, its ability to recover, its revenues, profits, and several other market factors, before investing in stocks amid a market slump. Similarly, it is unwise to borrow funds for investing in a volatile market. Leveraged bets magnify losses as they do the gains and, therefore, are best avoided in an unpredictable market.

In addition to the above, it is best to avoid tinkering with your long-term investment plans in a volatile market. Exercise caution and take time out to rebalance your portfolio as needed. Dodge sectors that are particularly unstable and diversify your portfolio to stay afloat. And most importantly, stay invested unless it seems financially impossible to do so!

Disclaimer: Investments in the securities market are subject to market risk, please read all the related documents before investing.

The above article is purely academic in nature and aims to provide knowledge about basic trading concepts & should not be construed as an opinion or advice for investing or trading.