When faced with danger humans generally have one of two reactions, either fight or flight. However, when faced with volatile markets, investors usually have only one reaction – flight. As you might have heard many investment gurus say, it is better to be patient and weather the volatile environment rather than exit your positions. But as an average investor, you would know that this is much easier said than done. When you see the daily gyrations in your portfolio, it is very difficult to fight the flight impulse. In such a scenario, it would be advisable to take a step back and reflect on the following points.
It is interesting to note that most investors, whether new or those sitting on the fringe, usually enter rising markets. Because they enter at a time when the market is trending, they have very limited experience with market volatility. However, it is important to understand that even in a bull market, small corrections along the way are inevitable. The market dips and then scales back multiple times in both a bear and bull phase. These dips should be viewed as an opportunity to buy quality stocks at compelling valuations rather than a reason to exit.
The fear of an unknown risk is often stronger than the fear associated with known risks. This is because once you know the risks, you can fight them ie. take steps to mitigate their impact on your investment portfolio. Thus, it is important to take stock of all your investments, assess the impact of the prevailing investment environment on the asset classes that form a part of your portfolio and use historical trends to determine your maximum wealth erosion. Once you have identified the potential sources of loss and the extent of loss, you can take steps to reduce their impact on your investment portfolio.
In times of doubt and fear, stick to your investment plan. Typically, you would have created a well-diversified investment portfolio that is spread across different assets based on your return requirements and risk profile. It is important that you continue to allocate assets and invest as per your investment plan so that you remain on the path to achieving your financial goals.
Nobody can really time the market and panic selling in volatile markets can only lead to you buying high and selling low. That is just the opposite of what you actually want to do. So stay put and weather the storm because the seas will eventually calm down.