Learn with ETMarkets: Volatility is reality- Top 5 strategies to deal with it

This amount is more than what they bought between 2009 and 2021 (net purchases). Various reasons, such as the Russia-Ukraine war, lockdowns across major Chinese cities, increasing inflation across India and the US, recessionary concerns in developed countries, and hike in interest rates by the Fed, led to the stock market’s decline causing tremendous volatility in the stock market.

Can you measure Volatility?
India VIX measures volatility in the Indian markets, which stands for India Volatile Index. The NSE introduced this index in 2003. The order book of the underlying index options calculates VIX. It is represented as a percentage.

The higher the VIX, the higher the perceived fear among investors. For instance, the VIX crossed 80 in March 2020 and crossed 30 levels on 24th February 2022.

After hovering above 20 during the beginning of July, the VIX has come down to 18.34 as of 14th July 2022.

Should investors be worried about volatility?
Once investors realize that volatility is a part of the market, they can focus on picking fundamentally strong stocks and investing for the long term. Interestingly, the 1 to 3-year returns offered by Nifty immediately after the VIX shot up have been attractive.

Analyzing historical trends, the Nifty one-year return on average has been 25% post-peak of the volatility index. Similarly, the average Nifty return for 2-year and 3-year from the peak of the volatility index has been 38 per cent and 56 per cent, respectively.

Also, in the past 11 years, there has been only one period (2019) where the Nifty return for one year post-peak of the volatility index was negative.

Agencies

How should investors deal with volatility?

Apart from accepting volatility as a reality while investing in the markets, here are five things that investors could do to deal with it:

Resist selling based on market movements:One of the first things is not to panic when the market turns volatile. Next, resist selling your stock when the markets fall; it’s one way to make your temporary losses permanent.



Staying the course may be difficult, but it will be better for your portfolio.

It does not mean holding stock blindly; instead, consider the stock’s prospects and role in your portfolio before you let the noise and fear drive your actions.

Take the long-term outlook:

Markets will go up and down, and you may experience several noteworthy declines in your long investing journey. However, when the market bounces back, the rewards could be attractive.

For instance, when the Nifty corrected over 60 per cent from its peak in January 2008 to October 2008, it bounced back by more than 150 per cent by November 2010.

Similarly, when it corrected 38 per cent from its peak in January 2020 to March 2020, it bounced back by more than 128 per cent by September 2021.

Historically, periods of bear markets, i.e., when the markets fall over 20 per cent, are shorter than bull markets. Considering that markets are unpredictable, timing such events is impossible.

Investors will do well to take the long-term outlook, stay focused on their investment plans, and ignore the chatter around.

Review your tolerance and capacity for risk:
Risk tolerance is your ability to handle large price swings, whereas risk capacity is the financial ability to take a loss. Reviewing your risk tolerance when the market falls is a good idea.

However, checking if you have enough money to handle near-term goals can be done anytime. But if you need money soon or can’t afford to lose money in the market, then investing in stable assets, defensive stocks, or pulling out of the market is better.

Ensure you have a diversified portfolio:
Diversification is the core value of a great portfolio. What you consider a diversified portfolio may not be one if it gets considerably affected by volatility.

Over time your portfolio may need to evolve. So, volatile markets are the best time to re-evaluate and balance your assets.

Rebalance Your Portfolio:
Market changes can skew your asset allocation from its original plan. Over time, assets with high returns may have a higher allocation, while stocks that decline may have a smaller share.

Your portfolio may need rebalancing and thus, at regular intervals, one should consider selling stocks that have become disproportionately overweight and use proceeds to buy stocks that have become disproportionately underweight.

Volatility is like entering into the deep sea. You never know what the wave will bring in. You cannot plan for the next move. But what you can do is be prepared for it and take the help of your financial investment advisor if needed.

(The author is Chief Investment Officer (CIO), Research & Ranking)


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