For investors, there’s a constant companion named ‘volatility.’ Like it or not, you have to accept this friendship. From the Covid-19 pandemic to the Israel-Palestine conflict, from a low-interest-rate environment to a period of monetary tightening, volatility in the stock market has never been absent. The severity of an event decides the magnitude of volatility the markets are bound to suffer from. The truth is that one cannot escape it but must accept it.
As a result, ever-changing market dynamics pose several investment challenges for investors on a perpetual basis and do not let anyone remain calm. However, one can adjust to these changing stock market dynamics for the better through various investment avenues and strategies and thrive in this complex investment world successfully!
Let’s discuss some tactical strategies that investors can use to their advantage for navigating modern investment challenges and mastering market dynamics.
Foreseeing the Future: The Volatility Index (VIX)
Simply put, the Volatility Index (VIX) is a statistical measure of the dispersion of returns for a stock market index for the next 12 months. A higher index number means a riskier security and depicts extreme fear among stock market participants. For context, the VIX number during March 2020 (when the pandemic struck) was around 85 levels, indicating extreme pessimism. As a thumb rule, a VIX level below 15 indicates that volatility is negligible, and stable to positive returns can be earned. Whereas a VIX Level above 15 indicates increasing volatility and fear among the investor community.
Hence, by having a look at this index regularly, investors can gauge the mood of the equity markets for the near future and make broader investment decisions accordingly. The index number will appear by just searching the term ‘India VIX’ on Google.
Debt/Gold as an Asset Class
The majority of young investors are determined to stay put in equities with all their investments in this single asset class. This is appropriate as they are young enough, have a high risk tolerance, and have ample time to recover their money in stocks if a severe drawdown happens.
However, introducing debt as an asset class in one’s investment portfolio to take advantage of short-term opportunities is not a bad idea. During times like these, when interest rates across the globe are at all-time highs and equity returns are subpar, investors can have some allocation to debt/bonds. As bond prices and interest rates have an inverse relationship, bond prices will inch up as interest rates start to cool in the near future, thus providing inflation-beating returns to investors.
And whenever a crisis breaks out, it is gold that outshines. Thus, having some exposure to this safe-haven asset class provides a margin of safety during economic downturns.
Sailing through the impact of technological advancements on various industries
The advancement of various technologies has made this world ever-changing. As a result, investors in various industries need to be mindful of the impact of these technologies on the companies they have invested in. Otherwise, the company/industry in question would become obsolete, resulting in a failed investment idea and a capital loss as well! To overcome this, investors should actively keep track of the company financials, management interviews, and ask questions of the management during conference calls regarding the same.
Another solution to this could be technology-focused mutual funds, which invest in tech stocks that are going to be the thing of the future and are going to serve mankind for a greater good. By investing in sector-focused funds like these, investors can assure that they are in sync with the latest trends playing out in the technology space.
Taking Advantage of Geopolitical Factors
If a war breaks out in a particular region and the supply chain of a particular commodity is disrupted, prices of that commodity will shoot up immediately. As an investor, your immediate duty is to look out for domestic companies that supply those commodities/products, as these will be able to temporarily earn supernormal profits.
Another way in which an investor can take advantage when a particular geography is in favour is by having a temporary exposure to that country/geography through mutual fund schemes. There are certain mutual fund schemes that have exposures only to companies in a certain country/geography. However, the risk and return attributes also need to be studied.
Factor Investing
The investment world has become so granular that investors have plenty of investment options to choose from. Investors can segregate their investments based on the factor exposure they want.
Factor investing refers to an investment approach that involves targeting specific drivers of returns across asset classes. There are various factors such as size, value, momentum, and quality that investors can target. For investors who believe that a stock in momentum would continue to do so, momentum funds/investing is the style they could go for. Many mutual fund houses are coming up with passive factor investing styles, thus providing an investor boatloads of options to choose from!
Navigating the ever-changing market dynamics has become more complex than ever. In such a scenario, investors can adapt to tactical strategies to take advantage of near-term market opportunities. These strategies include having exposure to debt and gold as an asset class, targeting specific sectors or geographies that are in favour, staying ahead of the technological advancement curve, and making the best use of factor investing strategies. By implementing these, an investor can master market dynamics in a much better way!
*The article is for information purposes only. This is not an investment advice.
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