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Navigating volatility in your investment portfolio

Navigating volatility in your investment portfolio
Navigating volatility in your investment portfolio

Navigating volatility in your investment portfolio

Navigating Volatility in Your Investment Portfolio

Anyone who has invested in the markets over a sustained period must be aware that volatility is an inevitable feature of the market. Volatile market conditions can be caused by various factors including an imbalance of trade, economic crisis, changes in national economic policies, overseas volatility, economic indicators, political developments and many more. Therefore, as an investor it is essential for you to understand that markets will frequently go through ups and downs. While market volatility can provide investors with an opportunity to make a profit, it also increases the risk of loss. Hence it is crucial that an investor treads very carefully and navigates through market volatility to maximise profits and negate losses.

What is volatility?

Volatility is the amount of risk or uncertainty associated with the size of the changes in a security’s value. In times of high volatility, the value of the security tends to be spread out over a broad range of values. It can result in the change in the price of the security over a short period in either direction. Whereas in times of lower volatility, the value of a security does not change dramatically and typically remains steady.

Strategies to navigate through volatility

Most of us often find it confusing to decide what actions to take when the market is too high or too low. It is particularly challenging to determine when the market has bottomed out. Critical decisions like when to put in fresh capital can often make the difference between superior returns or having ‘missed the bus’. These are usually the tough decisions that we grapple with either actively or passively. The following are a few tips which can help you make better decisions during market volatility.

No Panic Sells

You should always take your risk appetite into account when planning for your investment portfolio. During this phase, it is critical to keep in mind long-term benefits of the investment. You must stay firm and not lose patience during turbulence in the market, selling when the market is close to its bottom. It is best to resist such temptations and always stick to the original investment plan.

Panic selling can often lead to the conversion of notional losses into actual losses. Recovering from real losses is difficult. Therefore, it is better to remain calm during the bear phase while waiting for the market to stabilise before making any decision related to exits.

During the bear phase, if you have sufficient capital available, it may be a good option to add fresh funds in a phased manner to bring down the average cost of the mutual fund holdings.

Risk Assessment and Rebalancing Portfolio

Risk tolerance assessment conducted during a market boom can end up giving you a false notion about your risk tolerance. You can truly understand your risk tolerance only during a market crisis, as when the market is booming our notions of how much downside we can withstand can be misplaced.

Hence, the bear market is a good time to conduct a reassessment of your risk profile as it is more likely to give you an accurate reading. Check how much losses in your portfolio you can bear. If it is, say 20%, and your portfolio value has gone down beyond that, it means that you are already beyond your risk tolerance limit. As a result, there may be a need for you to shift from equities to more safer, fixed-income led investment options. However, if you feel that any further downside will not hamper your immediate or short-term financial situation, then it is best to stay invested.

This is also an ideal time to take another look at your asset allocation, to check whether the percentage allocations in your portfolio during a bear market are in line with your target allocations. If it is not, you could make efforts to bring it back to your desired levels through renewed planning. It may be beneficial to check if fresh purchases can be made to attain your desired levels.if you have the appetite to.

It is also worth considering moving from investments in weaker business to the stronger ones. Fundamentally strong businesses sail through during moments of stress, whereas uncertain businesses suffer. This indicates that such companies are better equipped to withstand market volatility and bounce back quicker than weaker ones. Therefore, it makes sense to invest or continue investing in proven businesses.

Handling surpluses and not attempting to bottom-fish

If you believe that you have surplus capital that you may not require for the next three to five years, then consider investing it in reliable and quality businesses in tranches every time the market experiences a significant dip. In case of mutual funds, you can opt for systematic transfer plans or STPs from your fixed income portion of the portfolio into large-cap equity funds which will most likely bounce back soon after the market begins to move up.

It is almost impossible to catch the market tops and the market bottoms, hence predicting it to that point is a futile exercise. You can end up burning your fingers badly if you try to bottom-fish by allocating money at an anticipated market low. It is important to remember that even if you miss the exact point when the market is at its lowest; you can still reposition yourself once the market makes an upward movement.

Stay focused on the long term

Just because the market is going through a bear phase does not mean you need to divert from your long-term financial goals. You must stay focused on the reasons why you invested in direct equities or mutual funds in the long-term and continue investing keeping in mind those goals that you had set.

It is interesting to note that all six major bear markets since 1986 that experienced a fall of 40% or more, recovered within 6 to 32 months, at times the recovery being more than the previous bull run . The secret of a successful long-term investment often lies in investing fresh capital at all levels of the markets. Therefore, if you have an ongoing Systematic Investment Plan (SIPs), then they should help you achieve rupee cost averaging while bringing down the overall cost of acquisition. Check out Standard Chartered SIP options that create wealth for the long term, regardless of market swings – click here now! 

To summarise, downtrends in the markets are common and part of the cyclical nature of markets. Hence making portfolio investments with a long-term outlook is the best option. Panic at any stage should always be avoided. A Market correction is a good time to analyse and ponder on risk tolerance thresholds and religiously follow the financial plan.

With Standard Chartered , you get a suite of carefully selected to help manage your wealth and grow it across major asset classes and mutual funds. Explore now! 

Disclaimer

This article is for information and educational purposes only. It is meant only for use as a reference tool. It has not been prepared for any particular person or class of persons. The products and services mentioned here may not be suitable for everyone and should not be used as a basis for making investment decisions. This article does not constitute investment advice nor is it an offer, solicitation or invitation to transact in any investment or insurance product. The value of investments and the income from them can go down as well as up, and you may not recover the amount of your original investment. Prior to transacting, you should obtain independent financial advice. In the event that you choose not to seek independent professional advice, you should consider whether the product is suitable for you. You should refer to the relevant offering documents for detailed information. Standard Chartered Bank is an AMFI-registered distributor of select mutual funds and third-party financial products and does not provide any investment advisory services.

Mutual Fund Investments are subject to market risk. Read scheme related documents carefully prior to investing. Past performance is not indicative of future returns.