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| Volatility should not affect your financial future |
| Hemant Rustagi / Feb 14, 2012, 00:26 IST |
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Equity markets have been testing the resolve of both seasoned as well as new investors over the last year or so. While volatility in the stock market is a natural phenomenon, many investors jeopardise their financial future by focusing on short-term catastrophes.
Volatile markets often make investors grapple with dilemmas such as: Should I exit my equity fund portfolio and move to debt funds? Is this a great buying opportunity? Should I redeem my holdings now and reinvest just before the market starts moving up? How long will the downturn last? These dilemmas often make it difficult for a rational decision.
If you are one of those investors who may be feeling the need to do something, the right approach would be: Not to act in haste. Remember, chances are that a well-thought investment plan is likely to remain relevant, even through these turbulent times.
The key, however, is to go for continuity in the investment approach (on a long-term basis), rather than adopting haphazard short-term strategies. Remember, a disciplined investment approach takes care of most imperfections in the market. Although systematic investing is often perceived as an option for only retail investors, its utility as an approach has nothing to do with the size of the investment. It benefits investors partly because they abandon any strategy that might prompt them to time the market, and partly because in the long run, stock markets tend to perform better than other asset classes.
It is ironical that investors who always dream of ‘buying low’ develop cold feet when the markets present great long-term investment opportunities. Clearly, their fetish for catching the market bottom often makes them wary of taking the plunge.
Besides, market declines also present an opportunity to find how foolproof your investment process is. Therefore, the best way to tackle market declines is to stick to your portfolio, provided you are sure about quality and asset mix.
However, if need be, you should also be prepared to realign your portfolio. If you are an equity fund investor, you can do so by moving investments from non-performing funds, as well as from those that might have taken you beyond your defined risk levels in the market frenzy to those with potential to provide better and consistent results as the markets start recovery.
If you are an investor looking to achieve long-term goals, initiating that process slowly and steadily may not be a bad idea after all. Of course, the key would be to adopt a sensible approach of spreading the risk by investing in a carefully selected mix of funds.
Don't get tempted to invest in funds that may have witnessed the steepest fall over the last year or so, in the hope of maximising gains during the recovery process. That's because in a falling market, some of the funds like mid-cap, small-cap as well as sector funds suffer the most. Considering the risks associated with these, you may end up compromising on some of the most important ingredients of the portfolio, as well as hamper your chances of building a well-diversified portfolio that holds the key to handling different market conditions.
As is evident, dealing with market volatility is far easier when you have an investment strategy in place. More, by avoiding any panic reactions, you can hope to build a sound financial future.
The writer is the CEO of Wiseinvest Advisors. Views expressed are his own.
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