By Saurav Basu
Studies have found that exposure to today’s volatile investment market has a strong impact on individuals’ psychological state, especially with stocks. In a turbulent stock market, investors are impacted by gains in the same way that they are affected by consideration of loss. As numerous investors have stated, “Buying stocks is like playing the heartbeat,” and “Heart rate fluctuates according to the stock market prices”.
This article provides smart strategies for avoiding losses and obtaining gains to clarify investors’ sensitivities. A well-structured approach based on disciplined investing, risk management, and long-term planning can help investors survive volatile periods and emerge stronger.
What Causes Market Volatility?
Market volatility arises from rapid changes in investment prices, driven by factors such as inflation, unemployment, and interest rates. For instance, a sudden increase in unemployment may signal economic weakness, leading to declining stock prices. National and geopolitical events like elections, wars, or trade disputes also contribute to uncertainty, affecting investor sentiment. Additionally, investor emotions play a significant role; panic selling can cause sharp price declines, while exuberance can lead to rapid price increases. These dynamics can result in substantial fluctuations in investment portfolios.
Here are key strategies for navigating a volatile market and building a robust investment portfolio.
The Safety Net: Maintain A Diversified Portfolio
Diversified investments is a significant mode for managing risk in investing. A truly balanced portfolio includes various investments such as equities, bonds, gold, and alternative investments, which can help reduce the impact of a downturn in any single asset class. Spreading investments across different industries, geographic regions, and market capitalisations minimises risk within equities.
For example, a diversified portfolio might include stocks from retail, transport, consumer-staple companies, and corporate and government-issued bonds. Additional diversification through money market accounts, alternative investments, and cash can provide further stability.
Stay Invested: It’s Time, Not Timing
Following timings of the ups and downs of the stock market is as unpredictable as a roll of the dice. Investors who attempt to enter and exit based on short-term movements risk missing key periods of market growth. In the Indian context, markets like the Nifty 50 and Sensex have historically rewarded long-term investors, despite short-term volatility. Exiting the market during uncertain times can lead to lost opportunities when the market rebounds.
While staying invested may not always feel easy, it is a time-tested approach to wealth creation. Instead of trying to predict short-term movements, focusing on “time in the market” instead of “timing the market” can help investors maximise their long-term wealth potential.
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The Steady Stream: Leverage Systematic Investment Plans (SIPs)
Systematic Investment Plans (SIPs) are the best way to invest in mutual funds due to discipline, and long-term wealth-creation potential. One of the most significant advantages of SIPs is that they allow investors to start small—as little as Rs 500 per month—and build a significant corpus over time. For example, investing Rs 5,000 per month for 25 years at a 12 per cent return can grow to Rs 95 lacs, even though the total investment is only Rs 15 lakh. SIPs also provide complete flexibility—investors can increase, decrease, pause, or stop contributions. Additionally, they eliminate the need to time the market, ensuring consistent investment regardless of market fluctuations.
Manage Risk, Don’t Avoid It
The term “Risk” in investments is always misunderstood. However, it is an essential part of wealth creation. Avoiding risk entirely may feel safe but can erode purchasing power over time. Successful investing is managing risk through time and diversification, not eliminating it. Asset managers focus heavily on returns, yet the risk taken to achieve those returns is often overlooked. Retail investors may believe that outperforming a benchmark equates to success, but returns should always be evaluated based on the risk involved. Risk and return are inseparable in investing—higher returns always come with some level of risk.
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Investing Amid Uncertainty
There has indeed been a turn of global events that have influenced our investments. Be it from the rise of COVID-19, wars like Ukraine-Russia or Israel and Palestine, all of this and many other situations might affect our interest in investments. Whatever is said, one should wisely continue to invest wisely. Emotional investing often leads to impulsive decisions, making it crucial to separate emotions from financial decisions. After many global downfalls, markets tend to recover quickly and can be swift and unpredictable, so exiting during downturns can mean missing growth opportunities. Staying invested with a long-term perspective helps navigate market uncertainties effectively.
Identify and Grab Investment Opportunities
It might not seem so at the time but market downturns can be a great opportunity to invest in quality assets at a reduced price. Economic slowdowns, temporary uncertainties, or shifting market trends can create openings to allocate capital more effectively and position for long-term growth.
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The Long Game: Stick to Your Financial Goals
Investment is a long-term proposition, which is why it is recommended only to invest with a goal between 5 and 10 years or more in the future. A long-term investment allows one’s money to ride out periods of global uncertainty, giving you the best chance of achieving your financial goals.
On the additional side remember to follow this if the markets fall:
Stay calm – Remember that short-term volatility has happened before and will happen again.
Ignore the noise – Paying too close attention to the reaction of your investments to global events can lead to emotional responses or trend-chasing that aren’t focused on your long-term goals.
Maintain asset allocation – Smart asset allocation can help you balance risk and return in a volatile market. By maintaining your original asset allocation, you can avoid making impulsive decisions based on short-term market movements.
Stay invested – Short–term dips are likely to be followed by market rises, so be sure your money is invested.
Downturns of stocks can be unsettling, but they also present opportunities for disciplined investors who aren’t adopting a structured approach—focusing on quality investments, maintaining diversification, leveraging SIPs, and resisting impulsive actions—investors can confidently navigate volatility. In the long run, staying invested, adhering to financial goals, and making informed decisions will pave the way for wealth creation and financial security.
(The author is Head – Wealth management, Tata Capital.)
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