How to deal with volatility in the equity market?
February 20, 2021 | 19841 Views
Successful Equity investment requires making many rational and analytical decisions such as quality stock selection, finding the ideal entry & exit levels, allocation, diversification, risk management and so on. It also requires immense discipline & calmness so that rational decisions free from emotional turbulence & panic can be made. After all, panic is not a strategy. It’s chaotic!
Volatility can truly challenge an investor’s ability to stay calm and make logical decisions based on qualitative & quantitative facts. In fact, we can even go as far as to suggest that discipline in the face of volatility is the most important ingredient which a smart investor can possess to be a successful investor.
StockAxis understands that while quantitative research can be learnt, the ability to successfully navigate through volatility is usually obtained after considerable practical exposure to the stock market. Unfortunately, this lesson more often than not comes at a heavy cost to the investors. Our 50 years of combined professional experience in the stock markets and in guiding investors achieve their financial goals has further clarified the concept of volatility for us. We would like to share the same with you so that you can level up your investments without making some of the typical mistakes made by an individual investor.
Expect volatility & accept volatility
It is the nature of the stock market to be volatile. While a bullish investor might prefer the markets to be moving up consistently, there are various other market participants such as speculators & traders who seek to benefit from volatility & corrections. In fact, it would be unusual for the markets to lack volatility.
Regardless of the fact that the market is crashing due to a black swan event or due to regular & healthy corrections, one must always remember that mankind has always overcome adversities and all the corrections & crashes are followed by rallies. Oftentimes, Powerful rallies.
Throughout history, the markets have continued to rise over time. New all-time highs continue to be reached and we expect that to continue being the case going forward.
Turn volatility into opportunity
Often investors forget that volatility works both ways. When downside market volatility occurs, it also means that falling prices may present you with some ripe buying opportunities.
For a moment, think like a consumer: would you prefer to go buy your clothes and home goods at normal retail prices or would you prefer to buy those items when they go on a sale? The same logic should apply to the investment decision-making process. Don’t see downside volatility as the enemy—see it as an opportunity. Don’t abandon your investment plans. After all, even if you have chosen the right stocks for your portfolio you cannot book sizeable profits if you get anxious & abandon them.
The common investor mistakes
One of the most common mistakes made by investors is that they try to time the market. The importance they give to catching the bottom-most price levels & exiting at the top most price levels is simply unreasonable.
While “buy lowest, sell highest” may sound like sensible advice, the chances of getting it exactly right are so rare that in practicality this advice can prove to be detrimental. Individual investors who stay in cash waiting for bottoms often lose patience as stocks continue to go up. This results in their missing out on gains rather than preventing losses. Besides, in order to make a new high, the previous highs must be broken.
It is easy to get such predictions wrong which can be costly. Our data shows that individual investors who radically reposition stocks in an attempt to catch the tips of the market reliably miss out on gains more than they prevent losses and generate excessive transactions and tax costs along the way.
Diversify to limit the effect of volatility
A lot of investors understand diversification as not keeping all the eggs in one basket. However, placing those eggs in various baskets & yet scattering them under the same shed does not make any sense.
Allocation & diversification works for you only if done in a sensible manner. Reckless portfolio allocation can limit your profits to a great degree. Ask yourself the simple question: is your current portfolio adequately diversified across all asset classes, investment styles, Market size, and so on?
At StockAxis, we have strategies available to build you a diversified portfolio across all spectrums: small-cap, mid-cap, large-cap, and multi-cap, with coverage across sectors to ensure true & effective diversification.
Talk to your Investment Advisor or Research Analyst
Feeling unwell? Go to a doctor. Car troubles? See a mechanic. Concerned about market volatility? Talk to a professional!
They can give you professional advice & go over your financial plan and help you determine any steps you may need to take. Missing post-crisis rallies—or any rallies for that matter—is one of the primary reasons the average investor tends to underperform over time. Investors too often tend to get in their own way, making emotional decisions at just the wrong times.
Working with a professional Investment Advisor can help you avoid short-term jitters. Keeping your eye on the longer-term horizon is your best strategy as an investor. Investors who sell when they’re uncomfortable tend to have bad timing—selling at a market’s bottom and missing the often-powerful rally that follows. StockAxis can help investors avoid making that mistake. We help investors enhance their portfolio’s diversification while also helping them stay focused on the long-term, through good times and bad.
Humans are wired to feel twice as bad about a loss as we feel good about a gain. Volatile markets can tempt an investor to forego future opportunities rather than face the possibility of a loss. And that may cause long-term goals to fall by the wayside. Though the pain felt from short-term losses can be difficult to stomach, it is not worth the long-term pain an investor is likely to feel if he ends up with suboptimal returns. Let us show you who we are and how we can work with you and for you. There is no cost to learning more about our strategies and our approach. We shall be happy to take the time to answer your questions and tell you more about what we do.