5 things to do when markets turn volatile

Publish Date: November 2, 2018

‘The stock markets are a reflection of the corporate sector,’ goes the popular saying on Dalal Street. But if that is indeed the case, it is hard to explain why the markets peaked in recent months. What was so spectacular about corporate earnings that drove Sensex and Nifty to scale all-time highs in August this year? And how does one justify the correction of over 10% that the equity benchmarks have witnessed ever since?

Even experts will find it difficult to explain this. But few would disagree that volatility in the stock markets is here to stay. There is a combination of factors at play here:

• Elections are due in five states during November and December, including in BJP-ruled Rajasthan, Chhattisgarh, and Madhya Pradesh. The mandate could well be a precursor to the ruling party’s fortunes in the general elections next year.
• The United States’ sanctions on Iran come into force from this month. It remains to be seen if crude prices will rise further following the fresh sanctions.
• The slide of the rupee has left foreign investors jittery, leading to huge sell-offs of their investments.

Living with volatility

By all estimates, the market volatility could persist for at least the next couple of months. In fact, some speculate that the Nifty may touch the sub-10,000 levels in early 2019. The sad part is that traditional investment strategies barely work during times of market volatility. It does not matter how meticulously you execute them. Therefore, don’t be on the lookout for guaranteed returns in a troubled market. Instead, it may be a good idea to go back to the basics of investing at this stage.

Also read: Worried about volatile markets? Here is your checklist

Sticking to the basics

1.   Sit idle: Just as the markets don’t go up always, they won’t come down all the time either. If the trades look dicey, hold your breath and sit tight. Market volatility is mostly short-lived. Once the phase passes, you can become active once again.

2.   Build up a cash reserve from profits: Prolonged volatility may hamper your trade prospects. Take a look at your portfolio and identify the stocks that have made significant gains. A good strategy could be to sell off a portion of these holdings and create a cash reserve for yourself. This way, you will be reducing your overall risk while staying prepared to make gains when better conditions prevail.

3.   Stay put: It is hard to find people who are endowed with a perfect sense of timing. Many cricketers have walked on to the crease but few could time their shots as well as Saurav Ganguly. Since this attribute is the privilege of a few, don’t think about getting out of the market just because it has turned choppy. You may not time it right when hopping back again. Simply concentrate on the job at hand and wait for the phase of volatility to end.

4.   Invest at all times, good or bad: When the markets are edgy, keep an eye on stocks that are available at a discount. You are bound to find plenty. However, always ensure that the stocks you are investing in are of strong companies. These would have the potential to bounce back when the market conditions improve. Also, stay away from investing heavily during market swings. Limit your exposure to reduce the overall risk.

5.   Trust history: Legendary investor Warren Buffet once said that in the stock markets, the rear-view mirror is much clearer than the windshield. If you are nervy, take a closer look at the history of the stock markets. You will notice that volatility is a part of its lifecycle. There is absolutely no reason to panic as the markets will have withstood far more volatility in the past. Just wait for some more time before things start looking up.

Also read: 5 tips to survive a stock market crash

The last word

Market volatility can be unsettling for traders and investors alike. Volatile markets are like double-edged swords. You know there are opportunities available but any wrong step and you could face losses. The markets can be ruthless and may punish you severely. However, the best thing about volatile market conditions is that they do not last long. So, don’t hit the panic button. It is important to remain focused by following a few basic principles of investing.

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