The stock market operates because of hundreds of buyers and sellers. For every buyer, there may be a seller. These forces fight with each other to finally decide the trend for the market. For example, In a volatile market, if there are more buyers, the bulls take the market to higher levels, whereas if there are more sellers, the bears will overpower the sentiment, and the prices in the market will fall.
Such scenarios are more straightforward for traders because there is a clear trend, i.e., bullish or bearish. However, the stock market is clueless at times, and so are the participants. The stock market trades with high implied volatility and moves in a tight range. Market turbulence can make any trader nervous. Such volatile periods are regular but may be a scary feature of the long-term stock market moves. Stock market volatility is not the best period in the market, but you can expect such sharp declines regularly over a period.
Here are six things you can do during a Volatile Market
1. Resist The Urge To Dispose Of The Portfolio Solely Based On A Recent Market Correction
While the market is correcting, bad stocks are one of the most common reasons why most investors do not create wealth in the stock market. Such temporary shocks in the market can make your losses permanent. Sticking in the long-term game with quality stocks may be helpful for you. Also, this doesn’t imply that you should hold on to your portfolio blindly. But it would be wise to consider your investment’s prospects and review your holdings, rather than letting the noise and fear in the short-term affect you
2. Take The Long View
A Bear market typically lasts much shorter than a Bull market over the long term. So you must be in the game to reap the benefits of the Bull Run as it comes, whenever it comes. It is not essential to time the stock market, but it is necessary to spend time in the stock market.
3. Review Your Risk Tolerance And Risk Capacity
Risk tolerance is your ability to manage portfolio downside and notional losses without acting upon them. In contrast, risk capacity is your financial ability to book a loss, i.e., converting your notional loss into an actual booked loss.
Such volatile markets and downturns can be a good alarm call to review your risk tolerance and portfolio risk. Although we recommend being calm while you decide, a regular portfolio review and your risk tolerance do not harm.
On the other hand, you must consider risk capacity frequently and regularly. More so during times of extreme volatility. If there is any actual loss, do you have enough liquidity/cash flow to manage near-term goals? Don’t invest the money you may need in the short term in the stock market.
4. Make Sure You Have A Diversified Portfolio
In highly volatile markets, you will realize that sectoral churns happen regularly. Sectoral churning is the flow of investments from one sector to another. If one industry underperforms, it may allow the other sector to shine. It helps when you have a well-diversified portfolio across asset classes, sectors, and different stocks. A well-diversified portfolio helps reduce the overall portfolio risk.
For example, if the bond yield increases, it affects the stock markets. Therefore, having a balanced portfolio in bonds and stocks will help you sustain such macro-economic risks.
5. Go For Defensive Assets And Defensive Stocks
Defensive assets are more liquid and secured, e.g., government bonds. These investments are highly liquid and guaranteed with no or limited downside risk. Within stocks, you can choose to move to defensive stocks. A defensive counter provides sustainable and consistent dividend income and stable earnings regardless of the state of the economy. Well-established companies like Asian paints, P&G, HUL, and Colgate, are a few examples of defensive stocks. These stocks tend to fall lesser in a bearish market because of their long-term business performance and consistency.
Note: In the investing parlance, the word counter is synonymously used for a stock. For e.g. HDFC Counter, Britannia Counter etc.
6. Rebalance Your Portfolio
Volatile markets tend to affect the small-cap stocks more than mid-cap stocks, followed by large-cap stocks. So if you have small-cap, mid-cap, and large-cap companies in your portfolio, then a correction in the stock market can affect your allocation strategy.
Rebalancing means reducing positions that have become overweight compared to the rest of your portfolio and increasing positions that have become underweight comparatively. Again, it’s a clever idea to review at regular intervals.
A thorough read of the tips mentioned above will tell you that panic selling is not the way to go when the markets are volatile. Staying invested and letting the magic of compounding increase your wealth.
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*Disclaimer- The stocks mentioned above are for educational purposes only. Please do not consider them recommendations/buy/sell calls from Research & Ranking.