INVESTMENT STRATEGY: Strategies to Ride through Volatility

When equity markets turn volatile, they cause a lot of anxiety and tensions. In the volatile times many investors abandon a carefully made investment plan in a knee jerk reaction and pay the price for it. Obviously, it is not a smart thing to do. The investors should realize that volatility exists in the market place and will remain so. After all, volatility is a statistical measure of the tendency of the markets to rise and fall. While volatility can be described as a natural phenomenon, there is a need for investors to develop ways to deal with it.

In reality, there are different ways people react to the volatile conditions. While a seasoned investor, who has been in the market for a long time may take volatility in his stride; a novice will be tempted to pull out of the market. For a seasoned investor who has spent time in the stock market, he would know that volatility is normal in the stock market and investor has to bear it out.

In a volatile market, an existing investor might be tempted to think that the best course of action would be to try and anticipate the market movements and move his investments accordingly. It is a proven fact that even experts find it difficult to achieve this. Given this scenario, it is prudent (a) to invest in equity markets with a longer investment horizon and (b) to invest small amounts regularly than one-time lump-sum investment, which ensures that one is not fully exposed should the market fall soon after the investment is made.

In a frequently volatile market, it helps to diversify. Diversification not only reduces risk but also helps in optimizing returns on a risk-adjusted basis. Mutual funds help to achieve this kind of diversification, which is generally not possible to achieve through direct investment in equities alone. Mutual Fund investors also need to make sure that their investments are in different funds and the portfolios of these funds also differ. If they do, it will have impact on the level of diversification that they achieve through them. Another important strategy is to rebalance the portfolio periodically. Rebalancing helps to maintain the proper asset allocation of the investor’s portfolio. Over a period of time, the mix of assets in investors’ portfolio may become inconsistent with his original asset allocation. Rebalancing the portfolio in a planned manner makes the portfolio less prone to volatility.

Another strategy is to invest on a regular basis. Mutual funds offer Systematic Investment Plan (SIP). SIP means making periodic investments of the same amount of money in an equity fund regardless whether the stock market is declining or ascending. The idea behind this strategy is that by investing the same amount each month over a period of time, you do not have to worry about right time or the wrong time to invest. Besides, this cuts down on the risk that an investor faces when he ends up investing a lump sum amount at market highs, as it is very difficult to predict the movement of the market in the short-term. In other words, SIP can be a good way to protect the investor from a volatile market.

It is also important to have a long-term investment horizon to handle volatility. Remember the longer the time horizon, the lesser is the risk. Therefore, it will not be wrong to say that the right approach to handle all kinds of markets, especially a volatile one, is to remain focused on your investment plan and objectives. Its the time in the market that helps and not timing the market