Perception: Market that did well is a good market;
Reality: Market that did well is a more expensive market.
Perception: Market that did badly is a worse market;
Reality: Market that did badly is a cheaper market.
Because of the gap between the perception of the investor and the reality in the stock market, we may tend to REACT to the market volatility emotionally. The following points will help you to RESPOND to the market volatility rationally.
Define: Why do you invest
If you have a strong and specific “why”, you will have a clear “how”. If you have a stronger financial goal which is not vague but well defined, you will be clear on how to respond to the market volatility.
Having a financial goal as “Want to retire early” or “want to accumulate 5 crores” is a vague goal. I would like to retire at the age of 55 with a corpus that can generate Rs.75000 per month income is a precise goal.
When you are clear with your goals, you know when you want to achieve it and how much money you need to achieve it. Then it will be easier for you to understand how this volatility will affect this goal in the short term and long term. You can take course correction if it is really required.
Set a pre-defined rebalancing mechanism
Based on the required rate of return and risk-taking appetite, you can fix an asset allocation ratio.
Let us say you have fixed an asset allocation ratio of 70 (equity) : 30 (debt)
You can pre-define when you have to rebalance.
You may decide to rebalance at the end of every financial year or you may decide to rebalance it whenever market goes up or comes down by 20%.
As you have set a rebalancing mechanism, you will not emotionally react to the market volatility; you will respond to the market volatility rationally.
“Volatility scares enough people out of the market to generate superior returns for those who stay in.” - Jeremy Siegel
Please remember that equity investors get additional returns only if they tolerate volatility.
Don’t Panic. Selling now means selling low. Temporary declines in the stock market are only a notional loss. It will become an actual loss only if you sell.
Don’t alter your long term investment decisions based on the temporary short term market volatility.
Remember: This too shall pass:
During the market correction or crash we may think, “Good times will never come”. But remember ‘This too shall pass’.
Morgan Housel says “Over time, the investor willing to endure the steepest emotional roller coaster will win.”
Regardless of market correction, don’t give up on your stock market investments. You go up on your stock market investments.
Don’t Pay over-attention to your portfolio balance
When you watch the portfolio balance more frequently during market volatility, you will get financial anxiety. You can reduce the financial stress by watching your portfolio balance just once in a month or once in a quarter.
This will help you switch off the noise in the financial market. Otherwise this will lead you to emotional decision making. Fear-driven responses and an impulsive decision will affect the long-term performance of your portfolio negatively.
So you need to consciously avoid paying over-attention to your portfolio balance. Otherwise, your smart phone may trigger you to check the portfolio balance frequently.
When the stock market is volatile, you need to focus on these basics. Battles are not won by the army but mind. So be strong and stay the course.
K. Ramalingam is the Chief Financial Planner at holisticinvestment.in, a leading financial planning and wealth management company.