Everything in life is unpredictable. You can’t quite be sure of anything, can you? That’s just how things were. If predictions were real, by now, we could see billionaires everywhere. Just like that, the stock market also has volatility. Here, you would have to be careful about how things work.
So, here we go – let’s learn what to do when the stock market is volatile.
Tips to Handle Volatility
a) Your Financial Goal is Always Plan A
That is the most important thing for you to remember. If you look at the VIX chart for the previous nine years, you will notice that it has been on a downward trend. However, in the interim, there have been at least 8-10 occasions where volatility has surged significantly.
The main concept is to stick to your long-term financial plan. This strategy is geared towards your long-term objectives and has some built-in safeguards to deal with volatility. The systematic investment plan (SIP), for example, is intended to capitalize on market volatility.
Since SIPs are the foundation of your financial strategy, they are critical to ensuring that the power of compounding works in your favour. If you look at the performance of SIPs over the last nine years, they would have significantly exceeded the index since they have taken advantage of market volatility.
Even if you find the best-performing trading platform in India, when you don’t stick to your financial goal, it is all just moving in a directionless form.
b) Futures and Options Can Benefit You
Futures and options are viewed by many investors as a low-margin alternative to cash market trading. They are, in fact, superb risk management products. These derivative products should be used most effectively in volatile markets.
For example, if you are long on equities in a volatile market, you can use futures to lock in profits while still benefiting from roll premiums. Second, you can utilize put options to hedge your risk, as well as beta hedging with index futures to mitigate portfolio risk. If you are wholly willing to be a little more daring and aggressive, volatility tactics such as straddles and strangles can help you make the most of tumultuous markets. In unpredictable times, you truly have a lot of options.
c) Go Far and Beyond with Diversification
Understand that there is no Best trading platform or one-suits-all solution. So, expansion is the only way.
When markets are volatile, how do you manage your asset mix? During volatile times, certain assets do not exhibit the same degree of volatility as equities. When equities indexes are turbulent, debt markets, for example, tend to be more stable. As a result, debt in your portfolio brings stability and the promise of consistent income.
Similarly, gold typically gains from macroeconomic volatility. In these turbulent times, increasing your exposure to gold through gold ETFs can be beneficial. The moral of the story after all is to keep your asset mix diverse in order to fight volatility.
d) Stay Strong on that Emergency Fund
Your emergency cash savings act as a financial buffer during difficult times or when unforeseen needs arise. The conventional wisdom states that you need to keep three to six months’ worth of money on hand to meet any immediate requirements that may occur.
Consider increasing that to six-to-nine months or longer if you are experiencing economic hardship or the nature of your profession. It will give you more financial flexibility to assist you in getting through difficult times.
e) Financial Professionals Can Help
To assist you feel confident that you are on track toward your financial goals, an experienced financial professional can assess your current plan or lead you through the process of building one.
Even if you are currently satisfied with your plan and investment portfolio, the economic landscape might change quickly. A financial professional can help you review your situation and change your plan as needed to protect or safeguard your financial position or take advantage of new market opportunities.
f) Don’t Run
In general, the answer is no (with some exceptions). Market volatility decreases, and prices rise over time. Maintaining a long-term plan through bad circumstances can also allow you to buy more stock when it is on sale. If you need the value of your assets fairly quickly or income to live on (for example, if you’re a retiree), it may be better to rotate out of stocks and into more conservative investments when volatility occurs.
g) Know Your Risks
Your investment approach is heavily influenced by the level of risks that you are willing to take. You will wish to from time to time.
Because market volatility can produce abrupt changes in investment prices, your asset allocation may deviate from your desired divisions following periods of intense fluctuation in either direction.
During these periods, you should rebalance your portfolio to bring it back in line with your investing goals and the level of risk you prefer. When you rebalance, sell some of the asset class that has grown to take up a larger portion of your portfolio than you’d like, and use the proceeds to acquire more of the asset class that has shrunk. When your allocation deviates by 5% or more from your original target mix, it’s time to rebalance.
You should also rebalance if an asset class has a divergence of more than 20%. For example, if you want emerging market equities to account for 10% of your portfolio but discover that they account for 8% or 12% following a significant market move, you may want to adjust your holdings.
You could never know what is in store for you – so be ready for it all. This guide could help you know what exactly to do when the market is volatile.