Follow these 4 strategies to navigate through the current volatile market environment

Don't change your long-term financial goals just because the market is going through a bear phase.

April 25, 2020 / 07:54 AM IST

Rahul Agarwal

The COVID-19 pandemic has taken an unprecedented toll on global economies. Out of the 197 countries in the world, the novel coronavirus, or COVID-19 pandemic has spread across 180 countries till the last count. With most of the world under a lockdown and phased reopening still questionable, the extent of the damage the outbreak has caused is still unclear.

While the developed economies can print money as their way out of the crisis, emerging markets are expected to feel the brunt for a long time; the expected consequences in the short term are collapse in productivity, massive unemployment, higher inflation and weaker currencies.

Although, the long-term effects of the pandemic on global economies are rather bleak it's perplexing that the same pessimism is not palpable in the stock markets around the world and India. The markets have moved significantly higher from their recent lows and are still showing strength on the back of massive government intervention.

In these confusing times, several questions do arise in an average investors' mind, have the markets bottomed out? Is the current rally a dead cat bounce, should I book my losses? Or should I put in fresh capital now so that I do not miss out if the market rallies from here? These are genuine questions that everyone who is invested in the markets either directly or passively through mutual funds is grappling with.

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To make it easier for the investors we have charted out several strategies which, if followed can help investors navigate the unchartered and volatile market environment:

Never sell in panic

Investment portfolios are created with a long term horizon, and ideally should be tailored around one's risk appetite, however, it is common that during turbulent times investors lose patience and take the first exit which is often closer to market bottoms.

By resorting to panic selling, they only convert their nominal losses into real losses which can only be recovered with astute planning and significant risk-taking. Therefore, the best strategy is to stay calm during the bear phase and wait for the market to stabilize and then make an informed decision regarding a potential exit.

Unless you are in need of immediate money to meet your expenses, do not pull out your money from an investment portfolio, rather, the best strategy is to add fresh capital if available in a phased manner to average down the cost of your equity or mutual fund holdings.

It's time to re-assess your risk and re-balance your portfolio

If you assessed your risk tolerance during the market boom, chances are that you have a false notion about your risk tolerance. The true test of risk tolerance only happens during a market crisis, during good times, we tend to be complacent and have misplaced notions about how much downside we can withstand. Finding yourself in the grips of a bear market will upend any haughty notions you may have about your risk appetite.

It is in this situation, that you must ideally revisit your risk profile as it will yield a more accurate reading. If you can’t bear the risk of your portfolio drawing down by 20 percent, that means you are at a point where you exhausted your risk tolerance limit and need to shift from equities to another fixed income products or safe investment such as bank deposits. If any further downside will not impact your short-term finances, it is better for you to stay invested.

Keep an eye on your asset allocation as well – if the equity percentage in your portfolio has gone down, you may want to bring it back to the levels that you have set for yourself. Since many investors may have paper losses right now, it may be a good idea to see if the same can be booked and fresh purchases executed. This will prove fruitful for those who can set off their gains against losses and for this you should consult your tax-consultants before making any decisions.

Also during this time, you can think about shifting from any investments in the weaker business to good stocks. In bad times, typically fundamentally strong businesses sail through, while weaker businesses sink. Better run companies will be able to withstand the turbulence and bounce back quickly. It makes sense to stick with proven businesses in times of market turbulence.

It is also a good strategy to think about rebalancing your mutual funds - buy the asset class that has become underweight in the portfolio like equity at this point due to the sharp correction by selling the overweight asset class. Remember to rebalance only to the extent that you have become underweight on equity and do not go overboard.

Invest or average down in tranches if you have a cash surplus, and don’t try to bottom-fish:

If you have any surplus that is not needed for the next 3 to 5 years, you may consider investing in quality businesses in a staggered manner during every major dip in the markets. For mutual funds, you may opt for STPs (Systematic Transfer Plans) from your fixed-income part of your portfolio into large-cap equity funds that will most probably bounce back quickly as and when the markets start moving up.

No one can catch the market tops and bottoms, and trying to predict it at the point is a futile exercise. If you try bottom fishing—deploying money at a perceived market low—chances are you will burn your fingers badly. It is alright if you miss the precise point when the market touches bottom as you can re-position yourself even after the market makes a move upwards. Continue to invest in a staggered manner spread over several months as the equity markets are always attractive in a low-interest rate, low oil price and overall lower inflation environment.

Stay focused on long-term and continue your SIPs and STPs

Don't change your long-term financial goals just because the market is going through a bear phase. You need to remind yourself about why you invested in direct equities or mutual funds, and therefore if you used equity or mutual funds for long term goals, continue on with investing towards those goals.

In the past 34 years (since 1986) there have been six major bear markets those which had witnessed a fall of around 40 percent or more, however from their lows, the markets have recovered within 6 to 32 months and have even returned more than the previous bull run. The success of long term investment lies in investing fresh capital at all markets levels, therefore, any ongoing Systematic Investment Plan (SIP’s) or Systematic Transfer Plan (STP) should be continued as they help in achieving rupee cost averaging and bring your overall cost of acquisition lower.

Discontinuing a recurring investment plan should only be done in cases of financial emergencies where you may have an immediate need for cash and not due to the fear of market volatility.

To summarize, every crisis comes to an end and with the amount of efforts and planning governments across the worlds are making in tackling the COVID-19 pandemic, it is amply clear that we will be able to navigate through these tough times. Portfolio investment should only made with a long term outlook, it should be remembered that panic and impatience can be disastrous at this point.

Market corrections are time to ponder and analyze one's risk tolerance and to follow the financial plan religiously. Market corrections are opportunities to exit speculative names, entering or averaging down into quality names and to rebalance and add diversification to one's portfolio.

The author is Director at Wealth Discovery/EZ Wealth.

Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Moneycontrol Contributor
first published: Apr 25, 2020 07:54 am

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