Investors are more likely to reach their long-term goals if they remain invested and avoid short-term decisions that may take them off course.
Don’t flee the market in a panic, but rather embrace the turmoil as an investment opportunity–you’ll be better off in the long run.
Market volatility is one of the most reliable things that you can predict. You don’t know how prices are going to move next month, next year. But we know one thing and that is, the prices are going to move around, and what we see is that prices often move around more than fundamentals, more than the underlying cash flows, which means at times, you’ll have these volatile periods where market prices will fall a lot, where stocks’ share prices will fall, and maybe even residential property prices will fall. People often get scared due to this. People feel the pain of losses more than they enjoy the pleasure of gains. One of the most important things you should keep in mind is that you don’t overreact in such low conditions and sell the stocks when they’re down or sell the shares when they’re down. That’s the worst thing that people can do.
Investors during volatile times generally make suboptimal decisions when emotions take over, tending to buy out of excitement when the market is going up and sell out of fear when the market is falling. Markets do ultimately normalise, and when they do, those who stay invested may benefit more than those who don’t. Markets are always forward looking while events such as pandemic, demonetization, crisis are always historical. Markets consider the forward earning of companies to ascertain its true value.
Investors need to keep their core focus on asset allocation at all times, this will make the journey really smooth. Always ask your advisor for the optimal asset allocation that can best be suited for you depending on your risk profile. Once the asset allocation is finalised, there is a need for a logical solution for taking decisions within this framework.
In my opinion, market volatility is an investment opportunity. Warren Buffett always says that he likes his stocks the way he likes his socks: on sale. So, often market volatility means lower prices. It’s a funny thing that in the stock market or the share market, people actually want more of something when the price goes up, and they want less of something when the price goes down. We think that’s exactly the opposite of how you should think about it. So, generally when prices fall, it means you’re able to buy stocks or shares, fractional ownerships of companies, at better prices. We view it as a positive, not as a negative, and so we prepare for the volatility by demanding good prices before we invest, and that allows us to have capital or cash available to take advantage of the market opportunity.
Hence, it’s really important during periods of market volatility that you don’t overreact, that you don’t sell out your investments at the bottom. That’s the worst thing that people can do. Our research shows that those who sell out at the bottom and then buy back in, say a year later when they feel more comfortable, do much worse than those who stay invested. So, according to us, the most important thing that you should do is to actually not do anything and to talk to your financial advisor or your financial planner and really stick to the plan. That’s what the plan’s are there for. In the short term, markets are going to move around a lot, and it’s very important that you take a long-term approach to investing. Our view is that when we have periods of market volatility or where prices fall, it’s often a time where you should be adding more to your investments rather than taking them away.
We are of the firm belief that to make money from equity markets, follow the ones who have actually made it big. The investors who have made it big not only in India but globally, are those set of people who have invested in the equity markets looking at the fundamental of the companies and not stock market prices. The handful of people on one hand who have efficiently timed the market have not done as well as the other set of people. It has to be accepted that the behaviour of the market is very irrational. There is a saying among the community that the market can remain irrational more than a person’s imagination.
(The author Rishabh Adukia is a Chartered Accountant and qualified professional advising on wealth management to individuals, millennial’s, emerging HNIs including others. His articles are published regularly in various financial newspapers and can be reached on [email protected] )