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.

5 simple steps to successful investing

A rather widespread misconception suggests that investing is a complex activity meant only for experts. Admittedly, there are certain investment avenues and investment styles which are complex, but investing per se, can be a simple activity. Also, successful investing is not beyond a lay investor who is willing to be disciplined and diligent. Here’s a checklist of 5 simple steps to successful investing.

1. Start early

Let me confess: When it comes to investment advice, this is a cliché, but it is spot-on, nonetheless. It is never too early to start investing. If you haven’t already started investing, get started now! An often-heard excuse for not investing is—“I don’t have sufficient monies now. I’ll invest when I have accumulated enough”. This is a cardinal mistake. Start investing with what you have, and then keep adding to it, as and when you can. For those who maintain that they can’t save at all, scan through your expenses and you will come up with ways and means to save money. Starting early means you have time on hand, which in turn will help you capitalize on the power of compounding, and grow your wealth.

2. Educate yourself 

Sure, there are investment advisers and financial planners who are equipped to manage your investments. But it will help in no small measure, if you equip yourself with investment-related information. The intention is not to become an expert or step into the shoes of your adviser, rather it is to enable you to make informed investment decisions. For instance, if your adviser/financial planner lays out choices, being informed will enable you to pick one that is most apt for you. Moreover, as an informed investor, you will be better equipped to manage your investments and finances. There are several investment-related websites and publications; select your areas of interest, and read up as much as you can.

3. Become resilient

While investing, the importance of having a sound temperament cannot be overstated. Let’s consider some scenarios to better understand this. In mid-2013, when equity markets were engulfed by volatility, were you tempted to discontinue your ongoing SIPs and exit your equity investments? Likewise, at present, when equity markets are soaring to record highs, are you tempted to invest all your surplus monies in equities? If the answer is ‘yes’, then there’s a case for changing your investment temperament.

A resilient long-term investor will typically use a market downturn to add to his investments. Likewise when markets enter frothy territory, he will be disciplined and not go overboard. The ability to block the noise and maintain a sharp focus on the basics of investing at all times, is worth its weight in gold.

4. Develop your investment style

Investing is a personalised activity. Your investment decisions must be guided by what is right for you. For instance, simply because your neighbour dabbles in derivatives or your colleague invests in micro-cap stocks, there is no cause for you to follow suit. Admittedly, it takes a while to develop one’s investment style, but it is certainly a doable task. This is where being informed about various investment avenues and aspects of investing helps. 

A major upside of developing your own investment style is that it makes investing a stress-free experience (as it should be). If you are at home with your investment style, you will be able to identify situations when it will not deliver, and navigate such periods without panicking.

5. Avoid superfluous comparisons 

The purpose of investing is to achieve investment goals. For instance, you might invest to accumulate wealth, set up a retirement corpus, or provide for your children’s higher education. If your investments help you to provide for those goals, you have succeeded. Do not complicate matters by comparing how your investments have panned out versus say those of your relatives, friends and acquaintances. 

You will do yourself a big disservice by indulging in such comparisons. For instance, even if others’ investments have fared better, it is likely that they were invested in avenues suited for them; perhaps those avenues offered a higher risk-return trade-off (versus your investments), and it paid off. But so long as you have met your investment goals, you are no worse-off. Investing isn't a cricket match where the team scoring more runs wins.