Rupakumar Pradhan, CFPCM, CWM®

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6 Strategies For When Markets Become Volatile

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6 Strategies For When Markets Become Volatile

6 Strategies For When Markets Become Volatile
February 09
13:36 2018

If markets get rough, it pays to have an investing plan and to stick to it.

Key takeaways

  • Keep Perspective: Political, Indian Budget, Taxation on investment and global market uncertainty are all constant, and downturns happen frequently. But market setbacks have typically been followed by recoveries.
  • Stay Disciplined: Trying to time the market has proven challenging—and could cost you.
  • Plan for a variety of markets: An investing approach built with your goals and situation in mind may help you cope with short-term volatility.
  • Consider help: You may want to look at a professionally managed solution.

Triggers for market volatility can come in many different shapes and sizes—Long Term Capital Gain (LTCG) tax on equity investments, global market uncertainty, earnings reports, geopolitical unrest. And market swings can rattle even seasoned investors’ nerves. But volatility is part and parcel of investing. So put such uncertain times to good use as a motivator to help ensure your investment strategy aligns with your long-term goals, timeline and stomach for risk.

Dramatic moves in the market may cause you to question your strategy and worry about your money. A natural reaction to that fear might be to reduce or eliminate any exposure to stocks, thinking it will stem further losses and calm your fears, but that may not make sense in the long run.

Instead of being worried by volatility, be prepared. A well-defined investing plan tailored to your goals and financial situation can help you be ready for the normal ups and downs of the market, and to take advantage of opportunities as they arise.

Market volatility should be a reminder for you to review your investments regularly and make sure you consider an investing strategy with exposure to different areas of the markets—Indian Stock Market mid, small and large caps, international stocks, investment-grade bonds—to help match the overall risk in your portfolio to your personality and goals.

Here’s how.

  1. Keep perspective—downturns are normal and normally short lived

Market downturns may be upsetting, but history shows that the Indian Stock Market (Sensex) has been able to recover from declines and can still provide investors with positive long-term returns. In fact, over the past 38 years, the market (Sensex) has experienced an average drop of 16.75% from high to low during each calendar year, but still had a positive average annual return @ 22.75% with 12 years negative return. Volatility is a normal part of investing.

  1. Be comfortable with your investments

If you are nervous when the market goes down, you may not be in the right investments. Your time horizon, goals, and tolerance for risk are key factors in helping to ensure that you have an investing strategy that works for you.

Even if your time horizon is long enough to warrant an aggressive portfolio, you have to be comfortable with the short-term ups and downs you’ll encounter. If watching your balances fluctuate is too nerve-racking for you, think about reevaluating your investment mix to find one that feels right.

But be wary of being too conservative, especially if you have a long time horizon, because strategies that are more conservative may not provide the growth potential you need to achieve your goals. Set realistic expectations too. That way, it may be easier to stick with your long-term investing strategy.

  1. Do not try to time the market

Attempting to move in and out of the market can be costly. Research studies from independent research firm Morningstar show that the decisions investors make about when to buy and sell funds cause those investors to perform worse than they would have had the investors simply bought and held the same funds.

If you could avoid the bad days and invest during the good ones, it would be great—the problem is, it is impossible to consistently predict when those good and bad days will happen. And if you miss even a few of the best days, it can have a lingering effect on your portfolio.

Trying to time the market can cost you. It is very difficult to time the market. Don’t do it. Keep investing regularly.

  1. Invest regularly, despite volatility

If you invest regularly over months, years, and decades, short-term downturns will not have much of an impact on your ultimate performance. Instead of trying to judge when to buy and sell based on market conditions, if you take a disciplined approach of making investments weekly, monthly, or quarterly, you will avoid the perils of market timing.

If you keep investing through downturns, it won’t guarantee gains or that you will never experience a loss, but when prices do fall you may actually benefit in the long run. When the market drops, the prices of investments fall and your regular contributions allow you to buy a larger number of shares.

  1. Take advantage of opportunities

There may be a few actions that you can take while the markets are down, to help put you in a better position for the long term. For instance, if you have investments you are looking to sell, a downturn may provide the opportunity for tax-loss harvesting—when you sell an investment and realize a loss. That could help your tax planning.

Additionally, if you execute a Fixed deposit—moving money from a Fixed Deposit or Recurring Deposit to Equity Investment or Mutual Fund SIP Investment—a downturn could help.

Finally, if the movement of the markets has changed your mix of large-cap, small-cap, foreign, and domestic stocks, or your mix of stocks, bonds, and cash, you may want to rebalance to get back to your plan. That could provide a disciplined approach that helps you take advantage of lower prices.

These strategies are complex, and you may want to consult a professional before making any tax or investment decisions.

  1. Consider a hands-off approach

To help ease the pressure of managing investments in a volatile market, you may want to consider an all-in-one fund or professionally managed account for your longer-term goals such as retirement or other long term financial goals. You may take the help of professionals like CERTIFIED FINANCIAL PLANNERCM. These different approaches offer a range of different services and different costs but, depending on the specific option, may provide professional asset allocation, investment management, and ongoing tax management.

The bottom line

Rather than focusing on the turbulence, wondering whether you need to do something now or wondering what the market will do tomorrow, it makes more sense to focus on developing and maintaining a sound investing plan.

A good plan will help you ride out the peaks and valleys of the market and may help you achieve your financial goals.

 

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” ~Warren Buffett

 

I am a CERTIFIED FINANCIAL PLANNERCM. For the moment, I have shared my experience growing up with you because it had a tremendous impact on how I do what I do.

If you have a question about your own financial situation please connect with me.  I’d be delighted to try to be of service.

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Client’s “Comprehensive Financial Plan” Experience. Read it.

About Author

Rupakumar

Rupakumar

Mr. Pradhan has over 20 years of experience in financial services industry. He was previously working with leading Life Insurance Companies, Broking Firms, Distribution Company, Financial Planning Company and Health Insurance Company. He has cleared several NCFM modules & is also AMFI Certified. His expertise is in Comprehensive Financial Planning, Technical Analysis, Portfolio Management, Investment Advisory, Wealth Management & Business Development.

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