4 steps for investors to ride roller-coaster markets

 For the investor who knows what he is doing, volatility creates an opportunity, said John Train, an American investment advisor and author of many books on investing.

Alas, this is not the case with most investors. Notional losses have got investors concerned about their investments. In my interactive sessions, I have been meeting investors, who have partially exited equity investments, stopped SIPs and have doomsday predictions about the markets. Some investors have moved back to traditional investments such as fixed deposits, gold and endowment policies. This is probably why they say that Investors’ worst enemy is not the stock market but their emotions.

Fear of losing money makes people take terrible financial decisions. First, they don’t invest in equities and, even when they do, they exit at the slightest hint of volatility and re-enter once markets have rebounded, thus losing out on the market rally. This really means that they seldom make money in equities and are always bad mouthing equity linked investments such as mutual funds.

Here are a few steps to follow when the markets are on a roller coaster ride.

Assess why you chose a particular instrument  

Have you done it keeping a financial goal in mind? If not, first build a financial plan. A financial plan will help you know how much to invest for each goal and for how long. If you invest without a goal in mind, your mind will get tuned to thinking about the investment for returns alone, thus, making you focus only on short-term market movements. Once you invest for a goal and know the time horizon, you will not usually react immediately to volatility.

Keep out the noise

Every source of information – TV channels, newspapers, financial websites, and social media – tend to amplify both good and bad news. The information overload causes more harm than good. The more the information you consume, the more anxious you become. This anxiety makes you overreact and take terrible financial decisions. Use news for information and not decision making.

Do not over-monitor your portfolio. It is a well-known fact that people who trade often on their portfolio do not really make more returns than those who follow a buy-and-hold strategy. I have come across investors monitoring fund NAVs or stock prices daily through various apps and I wonder how this helps them. In fact, I would think that monitoring the portfolio movement on a daily or even weekly basis would lead you to taking wrong decisions as you may exit in situations of temporary volatility too. Checking the portfolio once a quarter would actually suffice.

Remember the laws of nature

Markets cannot remain static. Each time after a downturn, markets have rebounded after a while in a big way. This is true in India and in other world markets as well. There will be ups and downs. But, over long term, returns will average out. The key is to remain invested during the downturn. Sitting tight (like you do on a roller coaster ride) through the volatility should be the mantra.

Take Financial Advice

Investors often tend to follow a herd mentality due to which their portfolios are over-concentrated in a particular asset class or sub-category – over exposure to mid-cap/small-cap stocks/funds. An advisor can stop you from churning investments based on market movements. Find a fee-only financial planner who will work with you on your financial plan and help restructure the portfolio, if required.

Investing is like a roller coaster ride. Jump off and you will get hurt. Stay on through all the bumps, you will survive and come back for more.

(The writer is Financial Educator, Money Mentor and Founder of Finsafe India).