The stock market has seen an increase in investor participation in recent months, but market volatility remains a key stressor. The average volatility index (VIX) hit 19.87 in the first half of FY23, causing many retail investors to pause and slow down their secondary market investments.
Market volatility is often destabilizing for investors, forcing them to recalibrate their investment strategies. But volatility is an integral part of investing. Embracing this market dynamic with the right approach can help you ride out periods of volatility and continue your investing journey without a hitch.
Here are some tested measures to make market uncertainty less daunting and more fruitful for your finances:
Invest for the long term
When the market is uncertain, stock prices tend to fluctuate widely and many investors find it tempting to engage in short-term trades. But an understanding of the finer nuances of the markets is imperative to making trading work for you. For retail investors with limited knowledge of the market, a more conservative approach is to invest with a long-term horizon.
Market volatility is temporary in nature. By staying invested for the long term, you can overcome short-term uncertainties without jeopardizing your investments. In fact, use market volatility to accumulate good stocks at lower prices and hold them for at least seven years. With this approach, you benefit from the long-term appreciation of your investments in the markets.
Stick to the plan
When the market behaves unpredictably, many investors abandon their goal-based financial plans to start playing the market. However, it could harm your long-term investment journey. Use your initial plan as a compass when making any investment decisions.
Take advantage of market opportunities if they bring you closer to your financial goals without destabilizing your portfolio. It’s always best to play it safe if taking on additional risk could jeopardize your financial stability. On the other hand, if your portfolio has room for more equity exposure, you can add more high-yielding instruments to your portfolio.
Switch to SIPs
In the face of volatility, one of the biggest challenges is finding the right time to enter the market. You could face significant losses if prices fall after investing. A Systematic Investment Plan (SIP) can be a game changer here. In an SIP, you invest a small amount in the market each month rather than a lump sum up front.
This approach allows you to buy more units when prices fall, making the market work to your advantage. You also benefit from Rupee cost averaging with SIPs, which could even reduce your overall investment cost over time.
Focus on non-cyclical sectors
If you want to continue investing in the market without taking significant risks, non-cyclical sectors can be a great option. Also known as defensive sectors, these market segments are relatively unaffected by economic uncertainties. They can even outperform the market in times of uncertainty.
Examples of such non-cyclical sectors include consumer staples and health care. These products and services are fundamental requirements for people and the economy, so companies in these sectors will generally remain relatively uncertain.
Portfolio diversification is the best strategy to protect your investment from market cycles. A good balance between fixed income securities and equities can help you optimize your exposure to risk and offset potential losses due to volatility. You may want to consider diversifying across various market sectors, asset classes, or a combination of the two to bring stability to your portfolio, especially during uncertain market phases.
Seek professional assistance
Every investor’s journey is different. The impact of market uncertainty on your specific portfolio may differ from the effect of volatility on another investor’s assets. If you feel you’re hitting a snag in navigating the markets, professional financial advisors can be invaluable. They offer advice and assistance to help you overcome market volatility. You can also rely on their expert opinions to ensure that you stay on track to achieve your financial goals as planned, undeterred by market movements.
At the end of the line
The market operates cyclically, so you will frequently see bullish and bearish market phases. Volatility is the norm and therefore it is always good to have a plan of action in place that can help you continue your investment journey, regardless of market uncertainties.
The steps outlined above can help you get started. The trick is to remember that with the right approach to investing, volatility can actually be an opportunity rather than a threat.
(The author is the Managing Director and CEO of Axis Securities)