Take Advantage of Market Volatility
Volatile markets (when markets rise and fall steeply within a few trading days or even during trading hours) can be discomforting. This is especially true when volatility is downward. However, smart investors use volatility to make better investment decisions, which, in turn, lead to attractive returns. Let’s understand the benefits that market volatility brings:
1. Volatility Keeps Investors Attentive
A long period of a sideways market results in a false sense of comfort that markets will remain sideways or move upwards. This makes investors lose focus of their investments, buy stocks without sufficient research, hold stocks of failing businesses and delay reviewing their portfolios. Eventually, this leads to higher risk and being unprepared for a possible steep downturn.
Volatility works as a stimulus to keep a sharp eye on price moves of your investments, stay updated on the business growth of stocks you own, review risk levels of your overall portfolio and the need to diversify.
2. Downside Volatility Inspires a Closer Look at Fundamentals
Every stock is priced based on its fundamentals. A steep downturn of the broad market due to extraneous factors (global developments, domestic macro factors, etc.) compels investors to review the business strength and outlook of the stocks they own. Remember even strong businesses will see a drop in their prices when overall market sentiment is downward. However, every stock’s long-term price direction is based on the growth outlook of its business. A downside volatility helps investors review whether they have allocated a higher amount to a particular stock or sector; rebalancing helps lower risk.
3. Downside Volatility Can Create Bargain-Buying Opportunities
Broad market volatility on the downside impacts stocks across the board. Even fundamentally strong stocks experience steep drops in their prices due to selling pressure. This provides buying opportunities to investors. If you have your eye on specific stocks that you have been unable to buy due to high valuations, downside volatility can help you make your purchase as an attractive discount. This improves your margin of safety (when the price of the stock falls below its intrinsic value) and can provide multi-bagger returns over the long term.
4. Bursting a bubble before full formation
Heated markets where there is rampant buying due to positive sentiment provides very few opportunities to pick fundamentally strong stocks at attractive prices. Downside volatility helps pull back markets where valuations have moved ahead of the intrinsic value of stocks; this provides attractive buying opportunities.
5. Volatility May Help Investors Understand the Benefits of Active Decision-Making
Increasingly complex scenarios, greater parameters impacting markets, paradigm shifts in businesses, etc. have made ‘Buy and forget’ no longer a viable investment strategy. It’s important to stay up to date with your investments to spot a change in trend early in order to book profit. Volatile markets compel investors to continually monitor their investments for changes that might have a long-term impact on the business of the stocks they hold.
6. Remember that Volatility Works Both Ways
History has repeatedly shown us that volatility works both ways – a pull back is followed by an upturn, which again sees a pull back and so on. In other words, every correction sees a V-formation which often leads to new highs. A good entry point at the trough can give you quick gains at the peak.
Volatility is an integral part of stock markets. Instead of letting volatility push investors towards emotionally charged decisions or panic-selling, we help our clients remain calm during turbulent times and seek to guide them towards fundamentals-based investing rules for generating solid returns over time.
At StockAxis, our stringent monitoring of prices against every stock’s intrinsic value helps our clients generate attractive returns over different time periods.