tips for investing
Five tips to investing in a volatile market
The stock market seems fairly restless. While everyone’s financial situation is unique, here are some basic pointers that are applicable to all.
1) Practice intra-asset-class rebalancing.
You can leave the portfolio’s baseline asset allocations intact and, instead, make adjustments within asset classes. While the performance of securities within a given asset class may be directionally the same over long periods, there may be significant variations in performance.
For example, an investor who has seen his allocation to stocks drift up to 70%–away from his 60% target–may want to leave that baseline allocation alone but change things up underneath the hood. That way, the investor can at least scale back on areas that may be notably overvalued while adding to potentially undervalued categories.
Within the equity space, for example, mid- and small-cap stocks have generally outperformed larger names over the past year or so and could, therefore, be hit harder in an eventual sell-off; de-emphasising the former and adding to the latter is a way to take at least some risk off the table.
2) Don’t try to wait for the right time to get in.
Don’t try to play the volatility. Doing so is based on the presumption that you can enter the market and exit at the right time. You may believe you can do very well at it, but it is much easier said than done. Look back at your own track record.
You may be boasting about the fact that you did not invest in 2007 when the market was on a roll. But did you enter the market a couple of years before that when it was at a low? Did you buy stocks immediately after the dot com crash? In 2008, when stocks were available at dirt cheap valuations, did you buy?
That’s the double-edged sword of market timing – it’s not just about skipping the market highs; should you miss a crash, you miss riding the recovery that follows.
Stick to your investment plan.
3) Do not discontinue your SIP.
This one is along the same vein as the previous point. To get the most out of a systematic investment plan, or SIP, you need to stay put during volatile times and bad markets. With every dip in the stock market, the SIP installment garners more units for the investor. This in turn lowers the average cost of purchase. Conversely, lump sum investing scores over the SIP route when markets rise secularly.
Over the past 10 trading sessions, the Sensex touched a low of 26,423.99 and a high of 27,603.71. Don’t let the volatility frighten you. Not too long ago, in October 2014, volatility hit the Indian market begging an answer to the same questions raised today. The reason at that time was more global – a likely recession is Europe, compounded by slow economic growth in the U.S., fear over the spread of Ebola, and geopolitical hazards. VIX (Chicago Board Options Exchange’s index of volatility) hit its highest level since late 2011 and the India VIX Index also jumped. But we got through that phase.
Don’t forget the hit that stock markets across the globe took in 2011. The Sensex ended the year at 15,454. By April 2, 2012 it moved to 17,478 only to drop to 16,546 by May 8, 2012. Yet the annualised 3-year Sensex returns (as on May 8, 2015) are 17.88%
The point is that if you ignore market upheavals and stay the course, you end up making money.
4) Clean up your portfolio.
Take a look at your portfolio and see which funds are the ones you are not happy with. Now is a good time to get rid of them. Compare their performance with their peers. Check if they have stuck to their mandate. For instance, are you invested in a large-cap fund which has a significant exposure to smaller fare? That may not be a good large-cap holding to own. Do you own any sector funds you have been waiting to dispose? Now could be a good time.
5) Clarify your investment strategy
Living with market volatility is easier when you have a firm investment strategy in place. If you have articulated your goals and are regularly saving towards them, then it is easier to stay on track.
Do not change your asset allocation based on the stock market. That should be determined by the goal, the amount of risk you are capable of taking depending on your situation and the time frame. The latter is determined by counting the number of years left until you achieve your goal.
If you do not have a clear strategy in place, work on it. If you do have one, stick to it.