Nothing is permanent in life and in the stock markets. Good times follow bad times as much as a bull run follows a bearish phase. Pessimists hurt by volatility in the market often say how the bearish phase is more prolonged than the bull run while forgetting how sporadic jumps in the market followed by a rally in Indian stock indices not only help overcome temporary losses but yield returns that far surpass the inflation rate.
The recent downtrend in the market is not necessarily a sign of things going south. In situations like these, investors must not panic but rather be prepared with their investment strategies. When it comes to devising such strategies, a sound understanding of the market is crucial.
Investors must be informed about market movements and macro factors that may cause the market to show an uptick or perform in the opposite direction. There is an ardent need to have a plan in place for investors to feel in control unbiased of how the market behaves in the short term or in the long run.
The market ahead in 2023 is expected to be similarly choppy as in 2022. Those new to investing must brace themselves and be prepared for whatever the market has to offer this year. In this volatile market, focusing on the following investing strategies will not only ensure continued returns but also enable much-needed stability. These include:
Diversify your portfolio
How many times have you heard of people yearning for a change in their lives? Well, it’s time to revamp your portfolio too as the same old stocks will always take a beating when the market gets a jolt due to sudden, unforeseen factors. If you are looking to protect and grow your investments, it would do a lot of good if you diversify your investment portfolio.
Spreading your money across different asset classes, such as stocks, bonds, and cash, allows you to reduce risk while still having the possibility of long-term returns. Take, for example, the current market scenario wherein many fund houses are offering fixed-term plans or funds that park money in bonds, government securities (G-Secs) and state development loans (SDLs). The idea is to allow people to park their earnings in alternative investment options independent of market movement.
Fixed-return bonds help yield returns even in the face of continued volatility, thus, doing away with the market risk. Bonds are an appealing option for investors seeking more stability in their portfolios while not missing out on potential gains from stock market movements.
Extra cash in hand helps to tide over situations synonymous with recession. There is another benefit of keeping some extra cash in your savings account or as small-tenure deposits as it allows investors to quickly access funds if needed, rather than having to seek loans due to sudden changes in market conditions or economic events such as a recession or the most recent Covid-19 pandemic.
Gold investments have always been known to hedge against inflation while also earning returns over the period.
There is no doubt that equity investments can help accumulate wealth if you decide to stay invested in them for a prolonged period. Their value, however, can fluctuate significantly in response to market conditions. Though equities have the potential to earn greater returns over most other asset classes, diversifying your portfolio can help you from possible heartbreak when the market bleeds for a long tenure.
Rebalance your investments regularly
Too much of anything can be damaging. This is true of your investments too. Check if you are heavily invested in one kind of investment or investment option alone. Too much of equities can spell trouble when the market suffers a dip. Excessive dependence on bonds will yield you returns which may not be enough to beat inflation nor will it help you create wealth.
The price of gold rises over time though there have been phases when allocating a major chunk of earnings to gold investments has not done much justice. Traditional deposits continue to be marred by low returns coupled with the brunt of taxation.
This explains the need to check your investment portfolio and rejig it continuously to achieve balance in the same. Take out money from equities if you have too much of your money invested in stocks or mutual funds. Having some cash in hand but too much cash lying idle in your account will do you more harm than good. Put money in gold only to hedge against unanticipated market downturns. Bond investments are good but focus on short-tenure bonds as bonds with longer maturities expose investors to greater interest rate risk than short-term bonds.
Revisiting your portfolio regularly will help as any losses incurred by one type of investment can be offset by gains made elsewhere in your portfolio, maximising long-term returns while minimising investment risks. Regular rebalancing also helps investors stay disciplined and focus on long-term goals rather than feel hassled when the market turns excessively volatile.
Put some money in low-cost index funds
If you are unsure which stocks to invest in or which mutual funds to opt for, putting money in low-cost index funds can be a great way to add stability to your portfolio while minimizing the risk associated with equity investments. This is because index funds are nothing but baskets of stocks or bonds tracking an underlying index as their benchmark.
Investing in these funds gives you access to hundreds of different securities without having to buy them individually. This makes it easier for investors to diversify across asset classes and lower their overall risk.
The expense ratios of index funds are also much lower than actively managed funds considering how the former does not rely on professional management or advanced research to decide which stocks to buy or when to get rid of stocks of a particular sector. Furthermore, because index funds passively track an underlying benchmark, they tend to outperform actively managed mutual funds, which may be more volatile due to stock-picking decisions made by managers.
Low-cost index funds are a great choice for investors looking to escape volatility while continuing to earn returns in sync with the market. Apart, when compared to other investment vehicles, such as individual stocks or exchange-traded funds (ETFs), these funds offer broad diversification at a fraction of the cost involved in buying and selling them.
Most indices are weighted based on market capitalization and not just price movements. This subjects them to far less volatility, thus, positioning them as far more suited to the financial goals of conservative investors.
Investing in low-cost index funds also does away with the need for portfolio rebalancing as the losses from underperforming stocks are largely balanced by gains from continuously high-earning stocks. The investment portfolio remains balanced as the allocation of stocks remains unchanged irrespective of market fluctuations.
Continue with your SIPs
Appreciate when the market is red as it allows you an added opportunity to invest in stocks available at cheap valuations. The moment you enjoy and appreciate the market fall, you have reached a stage wherein you have learned to absorb volatility. Treat market downturns as an opportunity to re-enter the market. First, continue to invest in the market through systematic investment plans (SIPs).
During a market downturn, discontinuing your SIP investments is possibly the worst mistake you can make as an investor. It defeats the purpose of SIPs by removing the ability to accumulate more units when prices fall. A downturn is an excellent time for SIPs to work in your favour. In a volatile market, SIP investments tend to perform better. As the market falls, causing the net asset value of a fund to fall, you end up buying and accumulating more units of the fund at a lower price.
If you have some idle cash lying in your account, invest in a lump sum in stocks with high growth potential or mutual funds invested in high-earning stocks and investment options.
The volatility in the market has a lot to teach. Firstly, it teaches us how things can suddenly go wrong or how markets can discredit us for our extreme expectations. Second, market downturns as in life teach you to be grounded. Like in life, stay attuned to what the market says. Have a plan in place and be prepared to move in tandem with how the market behaves.