How Investors Can Make The Most Of Market Volatility

Equity markets have been on a roller-coaster ride this week. After posting one of the largest single day falls (roughly 6%) on Monday, today markets staged a minor recovery of sorts. Not surprisingly, business channels and newspapers are dissecting every market development in great detail. Experts are busy predicting where markets are headed next. On their part, investors are tuned in with rapt attention.

While investors’ engagement with the external environment is understandable, this is indeed the right time to do some soul searching. The latter can prove to be the proverbial silver lining in this phase of market volatility. Surprised? Read on.

Equity investing is not without risk given the uncertainties involved; over shorter time frames, the risk is further accentuated given that even extraneous factors can significantly impact stock prices. As a result, while investing in equities/equity-linked products, one needs to be able to take on a certain degree of risk. This in turn necessitates an accurate assessment of one’s risk appetite. Sadly, that is easier said than done. When markets are rising, investors can erroneously start believing that it is easy to make money in the markets. This can lead to an inflated notion of one’s risk-taking ability. 

Harsh as it sounds, a volatile phase like the present one can provide a much-needed reality check. Now is the time to revisit your assessment of the risk you can take on. Ask yourself if you are yet as comfortable with equity investing as you were when markets scaled record highs earlier in the year. While an investment advisor can help with this exercise, you will have to play the most important part. If an honest introspection reveals that you have jumped the gun, don’t worry. All you need to do is rejig the portfolio so that it aptly reflects your risk appetite.

This is also a good time to evaluate if you’ve fallen prey to the ‘Keeping up with the Joneses’ blunder. At times, because a friend, relative or colleague claims to have done well with his equity investments, investors feel the urge to emulate his investments. The trouble with this approach is that it violates a basic tenet of investing. At its core, investing is a personalised activity. Investments have to be right for the investor in question. Hence, adopting the ‘one-size-fits-all’ approach can lead to unpleasant results. 

For instance, the friend (whose investments you have copied) may have a portfolio dominated by equities, since he has an investment horizon of a decade; conversely, you may have an investment horizon of just three years. In such a scenario, replicating his investment pattern wouldn’t be the best option. Yet again, it takes a bout of volatility to expose this inherently flawed investment practice.

Admittedly, market volatility can be a bitter pill to swallow. But the fact remains that while investing in equities, it comes with the territory. Rather than fretting over it, investors would do well to embrace volatility, and use it to their advantage by sharpening their investments.