The investing should be more of a healthy habit with good composer rather than impulsive. The volatility in the market escalates the investor’s anxiety which makes the investor to overreact to the market chatter buzz of short term news and the usual or unusual market movements often leads to the investor going berserk and they inappropriately reshuffle their asset allocations and thereby potentially fracturing their usual ability to achieve the long term investment goals.
One should always keep in mind that there are several unseen speed breakers which affect the market trends—change in the global economy, natural disasters, current global as well as domestic national news, change in the central bank policies and even the changes in the policies by the government impacts the domestic bourses. It would be far better for the investors to stay focused on the long term economics and the market expectations and not fall prey to the fear of the volatile markets.
So one should always have market volatility in perspective, focus on the long term investment goals and always maintain decorum of portfolio discipline and it is only then that the investors will be in a better state to manage their various investments. One thing is for sure that the past is surely no guarantee of the future trends so it will always hold true that those investors who can see much beyond the short term volatility will rule the roost and thereby make much better investment decisions.
The reasons for the fluctuations of the market prices:-- The stock prices move upwards or downwards and frankly speaking no one knows exactly when the next upswing or hitting the tank may occur, but one thing is for sure that there will be so many well dressed experts doing bla bla postmortem of the market at the end of the market hours.
However there are various reasons when the market nose dives:--
1) The profitability of the company.
2) Better returns in some other investments like bonds.
3) The rise in the interest rates.
4) The upward trend in the inflation.
5) The geo-political issues at national as well as the international levels affect the country’s economy.
A) The Word Volatility is not a Taboo:-- Most of the time the investors overlap these two words- risk and volatility, these two words are in no way synonyms. Risk is simply the potential for loss which may occur based upon the various factors. On the other hand the volatility arises from the random price movements which are a natural market phenomenon. Actually without volatility one just cannot dream of any opportunity of profit. Volatility actually drives the ups and the downs in the markets which in turn help in forming and sustaining the market trends as well. In laymen terms the volatility is nothing but the variations or fluctuations in the prices of the financial assets such as the stocks, exchange rates or the interest rates over a given period of time. So it is very important to understand the fact that the volatility is not a fall in the markets but it is simply a series of rise and fall in unsystematic order. Yet everybody is so concerned about the volatility during those phases when the prices decrease or go through the correction phases. So it is for this reason that in a very bullish markets most of the sheepish investors hardly gives a damn that the markets are exhibiting that volatility.
B) Risk Management:-- The basic fact remains with all the stock market investments that they all carry a certain degree of risk, so the risk of losing money is an integral part with stock market investments. The risk is usually determined by the volatility factors which are merely the degree of the speed of the fluctuations in the value of the investments and also the market risks which are triggered by the macro-economic factors in addition to the sentiments for any given company’s shares or fixed interest securities. One of the simple ways to handle the risk factor is to categorize the investments into various risk baskets, and it is always advisable for all the investors to take a medium to long term approach in investing in the equities. Whereas it solely depends on your objectives and the risk taking appetite which will obviously be a healthy blend of the equities, cash and the fixed interest securities.
C) Clarity of the Time Frame:--One should always select suitable investments according to one’s investment goals and segregation of the time frames can improve your financial well being, so one should always take some time off and devote to make ones selection carefully and these efforts will definitely pay off. Hold on tight with your decisions and let the time work to your advantage. As you know that all the financial instruments carry some percentage of the risk factors which can only be countered by the time frame for which it has been invested, just for example that the equities are usually for the long term say 3-5 years, and another way to manage the risk is just to review your investments with your representative periodically and keep making fine adjustments to cater to the circumstances and your individual needs. By matching the risk and the investment time frame you can chose best amongst both the worlds, the investment returns commensurate to the risk you can take and manage the volatility associated with the investments. You should understand and ensure that you are well versed with the time suited for the investments as well as the risk associated with it by undertaking the risk assessment tests.
D) Investments For The Long Term Always Pays:--When the stock markets moves unexpectedly most of the investors think alike that is shifting their investments elsewhere like the money market fund . One should always remember that the short term volatility is never going to cast shadow on the long term trends. A security can be highly volatile on day to day basis but in the long term they reflect stability as well as growth. While some of the investments maintain purchasing power over a long set of period but can wildly fluctuate in the short term. Another thing is that the assets with higher short term volatility risks such as the stocks always tend to have higher returns over the long term than the less volatile assets such as the money markets.
E) Diversified Basket: -- Just go by the old saying that never put all your eggs in one basket which will inculcate the basic understanding of diversifying your portfolio which will obviously reduce the intensity heat of the volatility if your assets have a little or no co-relation with one another. One of the best ways would be to diversify your portfolio by the company, industry, country and the asset class. This is one of the reasons why the successful investors always have a combination of equities and fixed income investments in their portfolio. Just by diversifying your investments into different types of stocks by company, industry and the country you spread out your exposure of the risks. If one company is performing badly chances are that the other sectors remain untouched by the heat. So just keep in mind that your portfolio should meet your present financial situation, your risk bearing capacity and your long term investment goals as well.
F) Never Try To Time The Market: -- The most successful timing of the market requires three aces namely a reliable green signal to indicate you when to get in and exit the stocks or bonds, gold or various other investment types. Now the ability to interpret those signals correctly and the discipline to act upon it. Usually the market timing could be tempting but that is rarely successful, because while trying to time the markets you tend to miss some of the best days of the markets or may hit the bull’s eye by investing on some of the worst days of the markets. So it is always advisable to keep investing regularly or may be systematic investment plan, because always trying to time the market throughout your investment tenure over the long term will always reduce the chances of your returns in place of enhancing the returns.
G) Systematic Investment Plan (SIP):- This is the path of investing in the mutual funds; SIP involves investing in the mutual funds by investing a fixed amount of money at regular intervals instead of pumping in huge amount of money. In SIP one can invest as little as Rs 500/- in the mutual fund scheme at a pre specified intervals may be monthly or quarterly, this route of investment thereby allows you to capture the highs and lows of the markets and averages your cost of investments over a period of time. A disciplined manner of investment avoids your risks of timing of the markets which in a way keeps the sentiments away from interfering with your investment decisions based on the market’s volatility. And when the markets go on the correction spree the investors end up in buying up some more of the units.
H) Systematic Transfer Plan (STP):- Most of the investors are aware of the word SIP but many of them are unaware of the STP. STP is a good choice if you are looking to invest in a big lump sum amount in a phased manner. Under a STP an investor can transfer a fixed or a variable amount from one mutual fund scheme to another within the same fund house at a pre defined intervals. Usually the investor’s pump large amount of money in a debt fund from where a regular amount is transferred at periodic intervals like daily, weekly, monthly or quarterly basis into a specified equity oriented funds. Take for an example an investor may invest few lakhs in a debt fund and opts for an STP of Rs 5k or 10k on the first of every month for the next 20 months or so in an equity fund. The benefit of STP is that such transfer’s average the cost of purchase and thereby mitigates the market related risks such as timing the markets and also offers the benefit of the rupee cost averaging. An STP is of two types- the fixed STP and the capital appreciation STP. In a fixed STP investors transfer a fixed sum of amount from one investment to another. But in a capital appreciation STP the investors take the profit from one investment to invest in another. The working of the STP is of such a manner that the transfer from one fund to another is considered as redemption and new purchase for the taxation purposes, and so when the money from the growth option of a debt fund is transferred before completion of the three years it will attract short term capital gains tax as this is going to be considered as a redemption from the debt fund and these gains will be added to your income and taxed as per the tax slab. The main thing is that since the future is not predictable and yes whatever has happened today, yesterday can be beautifully analyzed and described by various experienced experts, but looking at the present with clarity the volatile and the asymmetric returns. So expanding the investment holding period over the years and decades has historically proven to have improved the risk/return profile of your portfolio. The uncertainty is the obvious part of any investment and so is the volatility which is hand in glove, but your perspective can affect the investment decisions you made during the down turns of the markets. If an investor who views the volatility in the market as negatively will always tend to make irrational decisions. So treat the bearish market as an golden opportunity for you as an investor to build a strong foundation for your portfolio on the back of the lower costs of the units.