How was the year 2018?
2018 turned out to be a year with lot of surprises, there were various ups and downs, which resulted in a volatile market, yet, BSE Sensex ended at 36,068 – up by 5.9% from the start of the year.
Crude oil prices, global trade-war tensions, rupee volatility, liquidity concerns, policy action by central banks, multiple banking scams, IL&FS debt crisis, tension with North Korea, trade tension between USA and China, and surprising election results kept the market on tenterhooks.
Regarding market capitalization, mid-cap and small-cap indices saw steep gains in 2017 but finished 2018 on a somber note.
In this article
- Has 2019 Faired Well So Far?
- 8 Strategies to Overcome Market Volatility
- 1. Do NOT React Spontaneously and Never Speculate!
- 2. Never Stop Your Systematic Investment Plan (SIP)
- 3. Don’t Just Buy Into One Fund or Sector
- 4.Don’t Leverage
- 5.Adopt an Active Approach to Risk Management
- 6. Don’t Just Buy When the Market Is Low
- 7. Have a Drawdown Plan
- 8. Implement a Tactical Allocation Strategy
- Current State of the Market
Has 2019 Faired Well So Far?
The year 2019 gave us mixed signals, with a higher number of equity indices declining during January 2019.
The benchmark index marginally gained, outperforming broader and mid/small cap segments that ended lower during the month.
Strong corporate results, improving global demand, INR depreciation, softening interest rates and improving domestic liquidity supported the market.
However, the budget and election-related volatility in the domestic market, the global events including weak Chinese trade data and political uncertainty in the UK also weighed on domestic equities during the month.
During February, Indian equities advanced with positive enthusiasm witnessed in global equities owing to optimism ahead of the US President’s state of the union address.
Also, the market cheered at RBI’s unexpected decision to slash the repo rate by 25 bps.
However, gains were cut short later due to renewed concerns over the US-China trade war. Sentiments were also affected by muted domestic corporate earnings, surging global crude oil price and weak US retail sales figure.
8 Strategies to Overcome Market Volatility
These are the 8 key strategies to follow during market volatility
1. Do NOT React Spontaneously and Never Speculate!
Golden rule when the market turns volatile: Never make kneejerk reactions or speculate.
In fact, you should evaluate your investments in the following three ways:
1.If you are clear with your investment philosophy and believe in the fundamentals of your investment, do not pull out. Also, don’t try to time the market.
2.If you are not very sure of the investment philosophy, you should connect with a financial advisor and decide on a course of action.
3.If you are not aware of your investment strategy or why you invested, exit your investment.
Thus, when the market is volatile, you should carefully evaluate the instruments in your portfolio. You should use this time to clean your portfolio (literally).
2. Never Stop Your Systematic Investment Plan (SIP)
If you end your SIP investment during a volatile market, that is a wrong move.
This strategy defeats the purpose of SIP.
Remember, bearish market and/or volatile market is the time when you average out your cost of acquisition.
By stopping your SIP, you miss out on the benefit of compounding. Do not forget that equity yields best returns, in the long run, so stick to it.
3. Don’t Just Buy Into One Fund or Sector
Diversification is the key to a successful investing journey. I am sure you would have heard people saying – Never put all your eggs in one basket.
Diversification works on a similar principle. Market volatility made a sector or theme or fund, or stock attractive doesn’t mean you should invest all your capital into it.
You should look for instruments where there is a visbility of growth, strong management, governance, etc.
At the same, you should remember that over-diversification is also not good.
Leveraging is the act of borrowing capital.
NEVER leverage for investing – You must make this your investment principle!
Also known as margin investing, the leverage method undoubtedly can yield healthy returns, but losses are equally massive. Thus, this approach of investing should be avoided mainly when the markets are volatile.
5.Adopt an Active Approach to Risk Management
It is not advisable to be a passive investor in the face of volatile markets.
Given you are investing your hard earned money, you should be comfortable with your plan and your portfolio. This process ensures you take risk within the tolerable limit.
6. Don’t Just Buy When the Market Is Low
The method of buying when the market is low is known as bottom fishing.
Buying just because these names are available at a meager price doesn’t mean it will eventually rebound. Remember, some names that appear very attractive may be a value trap. Therefore, careful examination is required in every case.
7. Have a Drawdown Plan
You should have a drawdown plan as part of your risk management strategy.
The process must ensure a large part of your asset allocation to be done in a away you can minimize the portfolio drawdown.
Large portfolio drawdowns impact long-term returns, and thus, you should ensure that you can mitigate this.
8. Implement a Tactical Allocation Strategy
Fixed allocation to asset class or a particular sector or stock/fund/instrument makes little sense.
Your decision should be influenced by valuation, as it is the most significant determinant of your long term investment returns.
You should empower yourself with the knowledge of conducting fundamental value analysis, and once you have done that, you can choose an appropriate asset allocation technique, while mapping out your risk management plan.
In the tactical asset allocation method, you have the flexibility to make allocation decisions based on maximizing your probability of positive outcomes.
Current State of the Market
The past year and two months have been very volatile.
Understandably, investors are worried. There is plenty of negative news doing the rounds that can keep you on toes.
Therefore, it is now time that as an equity investor, you become extra vigilant with your investment decisions and prevent yourself from kneejerk decisions.
When the market starts tumbling, the various news agencies may tell give you an impression that the fall will never end. This situation ignites anxiety and fuels uncertainty among investors. This situation often results in irrational decisions.
Benjamin Graham – the father of value investing, states that the mindset of a value investor should be towards stock market volatility.
So don’t let a volatile market withdraw your investments. Analyze the current state of the market and then make an informed decision!
Disclaimer: The views expressed in this post are that of the author and not those of Groww