Strategy over noise: How to build resilient portfolios in volatile markets

Focus on your family's goals, not market noise, to build a resilient portfolio

The world is quite a volatile place today, and the news flows have turned into a flood. There are wars and there is the threat of tariffs and trade disruptions, which have an impact on the markets and economy.

Investing and managing one’s portfolio in these times is a challenge. Portfolio and investment decisions are supposed to be made rationally after considering all aspects impacting the underlying investment candidate. But in practice, investments are seldom just rational choices. There is always some subjectivity in an investment decision - past experiences, favourable or unfavourable news flows and other biases.

Emotion in decisions

Most deny that emotions play a role in taking any decisions, which includes investment decisions.

This affects the casual investor (which usually is the retail investor) more than the professional investors. Professional investors would be relying on gathering and analysis of real data, which will offer an empirical backbone to any inferences and conclusions, which retail investors seldom focus on.

Retail investors focus more on news and other information, along with their own experiences from the past and expectations of the future, while making the investment decision. This is why there can be problems with the decisions they may be taking.

That does not mean professional investors are immune to emotions and biases. After all, even they are human and are prone to many of the fallibilities of human behaviour.

Also read: MFs keep cash buffers high in July amid market volatility

News is not a call to action

We are living in a hyper-connected world. Equity and other markets react to every single stimulus, be it economic, financial, political, societal, etc. Today, that can be in the form of news, opinion pieces, comments, videos, podcasts, etc., which bounce across the globe in real time. Most of the information would have been priced in by the time the average retail investor tends to hear them.

Most situations are not as dramatic. The tariffs imposed on countries and their impact is a much debated topic. There is a lot of speculation on where this game is going and which countries, sectors and businesses will be affected. Markets are reacting to this. While this is an area of major concern, any reaction without knowing the future trajectory could prove wrong.

In all situations, it is purposeful, deliberate action that will bring in results - not reactions borne out of ambient noise.

Wisdom of the crowd?

It is easy for any of us to get swayed by what everyone else is doing. As social beings we want to conform and belong. We tend to be comfortable with what most people in our circles do - be it dressing, travel, shopping or even more weighty matters like children’s education, home buying, early retirement, etc. Even work-life balance, finding purpose, environmental consciousness, etc. tend to be developed by looking at those around us and what they do.

Is it any surprise then that people follow asset cycles like in equity, real estate, gold, etc.? Some investment fads like Emu farming, teak plantation, cryptos, multi-level-Marketing schemes, etc, also whip frenzy and draw crores of people in their wake. In case of investment, these also happen due to another factor due to the classic play of the greed and fear cycle and the fear of missing out (FOMO).

Doing what the crowd does need not always be correct. In fact, many times it is completely wrong. One needs to check the context of one’s own investment and then act.

Also read: Chart of the Day: Tariffs impact India’s market confidence

Panic reactions come back to haunt

Market volatility can spook the intrepid. Panic grips when the markets have fallen continuously for a while. At the other end, euphoria takes centre stage when markets are hitting new highs. The chances of mistakes at both ends are real - wrongly selling at the nadir and buying near the peak.

The easy way to avoid this is to have access to professional advisors who can offer counsel at times like these and save the day.

Investments should be purpose-driven

A portfolio created for a person and their family needs to be deliberately crafted to suit their needs and goals. There is no perfect portfolio - only portfolios that are a good fit for that family, for what they want to achieve.

A professionally created portfolio takes into account the goals and when they are coming up, personal/ family life stage, number of years to retirement, liquidity, taxation, risk profile, etc. Such a purpose-built portfolio would be the right fit to take care of their requirements.

Investments decisions should be strategic, with just a wee bit of tactical adjustments based on ambient conditions, if at all. What happens in most cases is quite the opposite.

The portfolio itself is constructed tactically to take advantage of that particular period, with the intent to ride any asset cycles and maximise returns. This makes the portfolio volatile, lacks proper diversification, lacks direction and needs to be constantly monitored due to the tactical investment philosophy.

Tactical portfolios seldom beat robust purpose-built portfolios. Strategically created portfolios have two other advantages – long-term performance and peace of mind!

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with a financial advisor before taking any decisions.