Worried about volatile markets? Here is your checklist

Publish Date: October 12, 2018

The BSE Sensex has been on a downward slide since 1 August 2018, dropping 3,520 points till 11 October 2018. That’s a fall of around 9.38%. Even apart from this, traders and investors have a lot on their plates: a depreciating rupee, volatility in crude oil prices, and non-banking finance companies’ debt crisis, to name a few. Add to this a rolling global bear market troubled by fears of tightening interest rates and a full-blown trade war between two of the world’s largest economies—China and the United States.

Life can indeed be tough in the stock markets. Then there are the perennial worries:

What if the stock markets’ plunge continues?

• When is the market correction going to end?
• What if my assumptions go wrong that some stocks have indeed bottomed out?

Instead of hitting the panic button during volatile market conditions, it is worth dwelling on ways to keep oneself steady. Here is a list to keep things simple.

1. Rationalise expectations: Keep an eye on the market corrections. If it has corrected by 10%, your equity portfolio should take a similar hit. If your allocation is high in mid- and small-cap stocks or funds, your portfolio will beat market correction. At no point should you allow depression to creep in if your portfolio has fallen more than the market. It could have been because your choice of stocks or funds did not do well this time. In a bull phase, things are likely to even out.

2. Keep calm: Even if the market has fallen 15%, draw comfort from the fact that 85% of your investments are still there with you. Bear and bull markets come in cycles. It won't be long before things look up again. The key is to be patient. Resist the urge to make rash decisions during times of volatility.

3. Bottom fish at your own risk: Advice on stock picks will flow in when the markets crash. Experts will identify the stocks that have taken a battering. But bottom fishing can be a risky proposition. Much of the ‘advice’ may carry a hidden agenda as stockbrokers want people to buy stocks to mitigate their own losses. Be wary of such advice and bottom fish at your own risk. In volatile market conditions, it is wiser to sit idle or, at best, invest in stocks or funds with a long investment horizon.

4. Turn off the TV: Expert comments on TV analysing why the markets are falling may leave you even more jittery. It may be a good idea to stay away from watching TV or newspapers for a while, at least until the bearish phase passes. Post-mortem reports cannot breathe life back into dead stocks.

5. SIPs are your safest bet: Many people think that investing during volatility is not a good idea. Some even stop their systematic investment plans (SIPs) when the market crashes. That is not a wise thing to do. In fact, an SIP is a wonderful avenue for cost averaging. In all likelihood, it will give you good returns going forward.

6. Rule of 100: Every market crash calls for introspection. Take a good look at your asset allocation. Assess if anything seems too risky. A golden rule to follow for asset allocation is the rule of 100. Subtract your age from 100. The figure you derive should be the percentage of your equity allocation. The rest of your investments should be in debt funds or government bonds.

7. The riddle of market correction: No one knows for sure how much the market will fall. So, there is no point losing sleep over something you cannot control. The markets enter a bear phase when it falls more than 20%. Remember, a bear market may take up to a year to start recovering. Therefore, it is a good idea to not jump to conclusions that the market will surge soon and start investing in stocks that make little sense. Also, be wary of investing in just one specific sector. It is advisable to split the risks and diversify your portfolio.

Conclusion

Market crashes are part and parcel of the investment life cycle. They are inevitable, no matter how much you guard against them. So, traders and investors should adopt a positive approach by following a few simple strategies to tide through the phase. It is good to liken the stock market crash to life, where bad times do not last forever.

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