Uncertainty is no stranger to the markets. Every few years, markets witness a phase wherein everything from news headlines to market trends becomes volatile, and confidence levels begin to wane. But what matters most for investors is not that there is uncertainty, but rather their reactions to it. In times of high volatility, one tends to make decisions based either on fear or greed. Both approaches are detrimental to your ability to create long-term wealth.
It is important that investors be able to distinguish between risk and uncertainty.
Whereas uncertainty refers to a temporary lack of clarity regarding the future, risk entails the potential of permanently losing one’s capital. In other words, risk refers to situations like buying of substandard stocks by the investor, paying exorbitantly high prices for investments, failure to diversify investments, among others.
Common Mistakes
Firstly, trying to time the market is a common error people make. When markets or volatile and falling, investors usually want to wait for the right time to join the market. However, you can be wise only in hindsight and market would have moved up before you seized the opportunity.
Secondly, many people make decisions based on the news. Most of the time, when you decide based on the news, you do so at the wrong time since the market may have reacted before you even see the news.
Thirdly, most investors exit their portfolio when there is a fall. Exiting during volatile periods might seem safe, but it might convert your temporary loss to a permanent loss, especially when the investment fits your goal.
Finally, another big mistake most people make is following the past winners. Most investors rush to sectors or funds that have done extremely well in the recent past when a fall or volatility results in their prices falling. However, the tide may have turned for these.
What Investors Should Do
Firstly, one needs to remain focused on the goals. For instance, when the objective is retirement, buying a home, education of children, or building wealth for the long term, it doesn’t make sense for short-term trends to drive your actions.
Secondly, patience needs to be exercised. Any attempt to see results immediately from long-term investments tends to lead to poor decisions.
Finally, you need to continue with your investments. Consistent investment through SIPs or structured lump-sum investments will help alleviate any burden related to timing the markets.
For equity investments, instead of going for rapidly fluctuating stocks or hot themes/sectors, investors should consider firms with sound fundamentals.
For debt investment, caution must be considered. Instead of taking excessive credit risks to generate extra returns, there is a need to play safe. Short duration investments are better in times of interest rate uncertainties. The debt allocation in a portfolio is important. It offers a buffer for the portfolio. This helps investors stay calm when markets are volatile and you need not panic-sell equities.
An Easy Investor Plan of Action
In times of uncertainty, an investor should first analyse their portfolio.
Determine whether the portfolio meets your objectives, risk capacity, and investment timeframe. Determine if it is well-diversified. Learn the amount invested in equities, fixed-income securities, and other categories.
Do not do anything drastic. It is best to stay in rather than leave because of fear. Conversely, do not do anything risky simply because you have enthusiasm about it. Keep investing on a consistent basis. With a well-formulated portfolio strategy, market volatility may prove to be your friend.
Final Thoughts
Long-term wealth is not built on responding to all the ups and downs in the market. It is built on discipline, diversification, patience, quality investments, and portfolio construction in accordance with one’s goals.
Investors are not rewarded for steering clear of uncertainty. Rather, investors are rewarded for good management of risk within an uncertain environment.
In case you are not sure about how ready your portfolio is to deal with uncertain markets, now is the perfect opportunity to take stock of things.
Enroll with us for a portfolio review and let us assist you in building a portfolio that continues to meet your goals.
