Are you a common investor or a smart investor? 5 ways to combat volatility

The equity markets took a steep dive during the election results day as the outcome was significantly different from the exit polls, but they reached all-time highs shortly after a few days.

Understanding how to handle these market ups and downs is key to securing your financial future.

Understanding Market Volatility

Market volatility refers to how quickly stock prices change. Imagine you’re sailing on a choppy sea—sometimes the water is calm, and other times the waves are rough.This is similar to what happens in a volatile market, in which factors like geopolitical situations, economic conditions, market sentiments, political events, and more can influence.

Common Investor vs. Smart Investor

A common investor and a smart investor often react differently to market volatility.- Common Investors: They often panic during market downturns and make impulsive decisions like selling off investments quickly. This behavior can lead to missing out on potential gains when the market recovers.- Smart Investors: They stay calm and understand that market volatility is a natural part of investing in equity markets. They focus on long-term goals rather than short-term market movements.

Pro-Tips for Investing During Volatility

1. Diversify Your Investments

Spread your money across equity, debt, and gold to manage risks and optimize returns. For example, when the stock market is down, gold prices often rise, balancing your overall portfolio. Think about cooking a meal: you wouldn’t use just one spice; you’d use a variety to balance the flavors. Similarly, diversify your investments to prepare for any market condition. Educating yourself before investing is crucial. Equities have a different growth trajectory than debt, so understanding these differences can help you make more informed decisions.

2. Stay Focused on Your Goals

Imagine you’re growing a tree. It requires time and patience, often facing challenges like bad weather and pests. Despite these challenges, you don’t abandon it; instead, you continue to water and nurture it, trusting that it will bear fruit in time. Similarly, keep your eye on the goal regardless of market turbulence. If you have a clear goal and are steadily moving in that direction, prioritize consistency and patience.

3. Use Market Dips as Buying Opportunities

When the market drops, it’s like shopping during a sale. You can buy at lower prices, positioning yourself for potential future gains.

4. Continue Investing via SIPs

Systematic Investment Plans (SIPs) are a smart way to invest regularly and spread out costs over time. In volatile markets, SIPs work to your advantage by allowing you to buy more units when prices are low and fewer when prices are high. This averaging out of costs removes the worry of trying to time the market.

5. Don’t Redeem During Highs or Lows

Pulling out investments during market highs or lows can hurt your returns. Selling during a market low locks in your losses, while selling during a high might cause you to miss out on potential further gains. Think of it like selling your gold during a temporary price drop—you’d lose money instead of waiting for the market to potentially recover and prices to rise again.

India’s Growth Story: A Bright Future

Despite the current volatility, India’s long-term growth story remains strong. With a young population, a growing share of affluent families, development in various sectors such as infrastructure, technology, tourism, and health, along with an increasing contribution of women, the country is poised for significant economic growth. Staying invested allows you to benefit from this growth over time.

Conclusion

As a smart investor, you can navigate market volatility with confidence and secure your financial future. Empower yourself with knowledge, remain calm during market fluctuations, capitalize on market dips as buying opportunities, maintain a clear focus on your financial goals, and diversify your investments strategically. These strategies will help you build resilience and achieve long-term financial success.

Remember Charlie Munger‘s wise words: “The big money is not in the buying and selling, but in the waiting.”

(The author is Founder & MD, LXME)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times)