Sunday, April 2, 2023

How to beat stocks volatility on NSE

The market has experienced a heightened state of volatility in the past several months. In the year-to-date, the benchmark index has lost 128 points or 3.2 per cent of its value. It’s also 20 per cent below its February 2015 high.

Now, high volatility should not be surprising since equity markets stocks are naturally volatile. Nevertheless, it can be unsettling.

Therefore, if volatility is inevitable, what can investors do? Is it manageable? The quick answer is yes. And the “how to manage it” is the subject of my article today.

Every investor is different based on how they perceive volatility, but there are certain things they can do to better “manage” volatility.

First, investors need to have an asset-allocation strategy. Yes, stocks boast the potential for higher long-term returns than bonds and cash precisely because they’re riskier but they also tend to experience extended periods of weakness, as they did in the 2008-2009 bear market.

A good way to moderate the impact of the inevitable stock market downturns and heightened volatility is to diversify an all-stock portfolio with investments in bonds, which can cushion a portfolio’s decline in value while generating steady income.

Secondly, investors need to adapt their investment strategy to a fast-moving market. Usually, when the stock market turns turbulent, most investors resort to watching the bear erase their gains and eat into some or all of their portfolio capital.

This happens as investors at first get spooked to flee but then choose to wait in order to make up their losses, a situation which often leads to more losses.

To avoid this situation, it is prudent to temporarily adjust the portfolio to a changing environment even when that means liquidating the whole portfolio into cash. Of course, one can always redeploy capital once the markets return to normalcy.

Lastly, investors need to understand what they own and map it to their goals. A cardinal sin of investing is taking on risks that don’t make sense or no longer make sense given one’s situation and life stage.

Investors need to understand what each security and asset class is doing in their portfolio.

If one expects to spend from their portfolio within the next few years, consider allocating more towards less risky assets (bonds and cash).

A good rule of thumb is to invest your “age” into bonds, that is, if you are 60 years old or more, it means 60 per cent of your portfolio should be invested in bonds and the rest in equities. This simple approach of calculating risk exposure seeks to manage volatility according to ones needs and goals. In all, the above ways can help investors reduce the volatility in their portfolios in the current period. If, however, one chooses to stay invested, they should be aware of how the market conditions will affect their portfolios.

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