Volatility: Staying Calm In Market Turmoil

Days like Monday test the patience of even seasoned participants. When headline indices tumble by more than one and a half per cent and nearly every sector turns red, the instinct to do something, anything, can feel overwhelming. The Nifty 50 ended the session near 22,780, and those checking Sensex Today on their phones would have seen a sea of red across portfolios. Yet the way an investor responds to such moments often matters far more than the moment itself. This guide looks at practical, evidence-based habits that can help retail investors navigate turbulent phases without making decisions they may later regret.

Understand That Volatility Is Normal

Equity markets are never linear! There is bound to be multiple corrections of 5-10% in a given year, even as it ends on a positive note. Volatility is the norm in the equity asset class, and higher returns on stocks versus fixed deposits or other debt instruments are compensation for taking on this risk.

History of Indian markets is replete with instances of marquee declines followed by spectacular recovery, triggered by global financial turmoil or domestic policy-related events. Investors who stayed invested and continued to add to their holdings during such phases have witnessed their portfolios bounce back and deliver superior returns

The Behavioural Traps to Avoid

Loss aversion:

It is a human tendency to feel twice as much pain on a loss vis-à-vis joy on a gain, leading to a knee-jerk reaction to sell during market stress. The solution lies in having a systematic investment plan that you stick to, rather than trying to predict the market.

Recency bias:

A natural human tendency to extrapolate recent events into the future dominates during such phases, leading to panic selling. Again, having a systematic approach to investing based on your own plan, and not getting swayed by what others are doing or what one reads on social media, is critical to avoiding panic.

Herd behaviour:

A combination of loss aversion and recency bias leads to herd behaviour wherein investors follow the crowd without understanding the true rationale. Remember, crowds are often wrong – the most important thing is to follow your own plan.

Avoid Checking Too Often

Constant tracking of portfolio values leads to excessive stress and actually reduces your odds of success. Many long-term investors prefer to track their portfolios only once in a while. The markets are a great place to test one’s mettle and patience. Intraday fluctuations are completely irrelevant to the performance of a business over a long period of time.

Beware of Leverage

Leverage magnifies losses and can force you to sell at a price much lower than what you originally paid, especially if the trigger price is breached. It is therefore important to stay within one’s risk comfort zone and not take on excessive leverage. One should always invest in a manner that allows one to stay invested for the long term, rather than getting forced out due to a margin call.

Practical Tools That Help

Systematic Investment Plan (SIP):

This is one of the most effective tools at the disposal of a retail investor. A SIP ensures that one buys more units at lower prices and fewer at higher prices by virtue of rupee-cost averaging. It is disciplined, uncomplicated and does not get one’s emotions involved

Asset allocation:

This is perhaps the single most important weapon in an investor’s armoury. Allocating money to different asset classes such as equities, debt, gold and cash in accordance with one’s risk appetite and time-horizon and rebalancing the same from time to time, ensures that one is never fully exposed to the risks inherent in any one asset class. Rebalancing also instils the much-needed discipline of buying low and selling high.

Maintain an emergency fund:

It is important to have a rainy-day fund that can tide one over a few months. This prevents one from selling off investments at throwaway prices to meet an unforeseen expenditure.

Reviewing Rather Than Reacting

It is during such times that it is important to pause and reflect. If an investor reviews the rationale behind every stock in his portfolio, it will help him/her to make the right decision. Has the business deteriorated? If yes, then one should consider selling it. If not, then it is best to hold on.

Does one’s portfolio have too much concentration in a particular stock or sector? A sudden crash in one of them could expose the risk of excessive concentration. It is critical to maintain an adequate dispersion in one’s portfolio across sectors and market capitalisations. Further, if an investor has written down his or her investment objectives and time horizon as well as the drawdown that he or she can withstand, it will help during such phases. It can also be useful to talk to a professional financial planner

Seeking Guidance When Needed

An investor who is a bit lost and unsure of what to do would do well to consult an independent, qualified and registered investment adviser. They understand the markets and can advise one according to one’s specific circumstances. It is important to be wary of any unsolicited advice as well as exaggerated promises of returns that are invariably on offer during such periods.