How To Make Volatility Work For You

American historian and economist Peter Bernstein once said, "Volatility gets you in the gut. There's no question that when prices are jumping around, you feel different from when they're stable." This sentiment holds true even today, for a large segment of investors who find themselves shying away from the market during turbulent times. However, is it necessary to view volatility as the enemy, or is there a way to make the phenomenon your friend? Given that market volatility is here to stay, opting for a friendly view towards it rather than remain averse is advisable. You can do this by simply understanding the phenomenon and devising fail-safes to continue creating wealth, especially during market turbulence.

Decoding Market Volatility

As you may have noticed, the year 2023 was quite a volatile one for the market. From the turmoil between Israel and Hamas leading to sharp plunges to the euphoria around India's G20 presidency catapulting the market to record highs, there never was a dull moment for investors. The stock market is inherently volatile, a trait that stems from uncertainty encompassing events like IPOs, unpredictable market reactions, and unforeseen global occurrences. This volatility, while often viewed negatively, presents opportunities for discerning investors. As market reactions to these events vary, they can create chances for strategic investment, allowing savvy players to acquire valuable stocks at lower prices. Conversely, those who react hastily often find themselves at a loss. As Warren Buffet aptly puts it, the stock market essentially transfers wealth from the impatient to the patient, turning volatility into a potential advantage for those who navigate it wisely. And here is how you can make volatility your friend, thus creating sustainable wealth.

Turning Foe to a Friend

The first thing you must remember revolves around volatility's typically short-term nature. If you are in the investment game for the long term, short bursts of volatility need not bother you. Rather, consider these events as a way to generate wealth by investing in undervalued stocks during volatile markets, with a long-term view. To realise such opportunities, you must alter your investment view from a price-based one to a value-based one – during market downturns, you may find that a fundamentally strong stock is going down in price, owing to poor sentiment, and this is the perfect time to buy on the dip. When the market invariably rises again, your value buy will hold you in good stead. You can also practice this through mutual fund investments via the Systematic Investment Plan(SIP) route, wherein, during market downturns, your investment amount helps you purchase more units in the fund, thereby setting you up for better returns at the time of redemption in the future. Remember, over the long term, markets always tend to move upwards and, therefore, choose to remain invested even during volatile scenarios.

Asset Allocation to the Rescue

Another excellent way to counter the negative impact of volatility and make it your friend is by following a balanced approach while building your portfolio. As you must have noticed, during the recent stock market plunge owing to the Israel-Hamas war, safe haven assets such as gold and debt witnessed a surge. When your portfolio is optimally diversified across various asset classes that have low correlation, such as equity, debt, gold, real estate and alternative investments, you will find your returns remaining largely stable even during volatile periods because when one asset class tends to dip, another will undoubtedly take its place. And with your portfolio being diversified in nature, you will stand to gain in all situations while mitigating the underlying risk.

As an investor, it is extremely easy to indulge in knee-jerk reaction to market volatility, but it is imperative to remember that the market calls for a logical and rational response rather than an emotional one. While it is true that human beings have an emotional relationship with their money, only the wise and patient end up accumulating wealth. Always assess the reasons behind market volatility before you give in to either euphoria or dejection and based on your assessment, take investment calls that will help you emerge stronger from the turbulence.