Volatility is an inherent part of the life of a stock market investor. Let’s try and understand this in more detail:
It's psychological more than anything else:
The market tends to over-react to an event or policy decision. Often, the volatility is a by-product of this over-reaction. A lot of new investors experience the same emotional fluctuations and excitement that drive the markets.
In this backdrop, it suffices to say that handling volatility is more about one’s psychological make up, than about one’s ability to pick stocks. Increased volatility tests the patience of the investor, and often requires him to remain firm and stick to his conviction.
Treat volatility as a friend:
If an investment is backed by thorough research, volatility can, in fact, be a friend. The market rewards investors in the long term. For that, however, the investor may have to endure some short term volatility.
In the short term, the market tends to overreact. It could be on the upside or downside based on the particular situation. This over-reaction or volatility creates attractive buying opportunities or price bubbles in the market. For an investor, this volatility often provides the desired entry point into a particular stock.
How to manage volatility:
When markets are volatile, the most important task for an investor is to maintain faith in his investment ideas. It is, however, easier said than done. Watching the portfolio go down by 30-40% can be daunting and emotionally draining for a novice investor.
This is the time when many investors start panicking; they sell-off their investments and burn their capital in the stock market. In fact, what they should do is the exact opposite of it. This opportunity should be utilized to pump in more capital as stocks would be available at more attractive valuations.
Key takeaways:
A volatile market often provides a great opportunity to buy stocks at cheap valuations. However, picking a stock after thorough research and understanding of its fundamentals is very important.
The stocks that bottom out during the bear market would pick up again with improvement in the business and investment cycle. Investors must maintain patience and stick to their investment approach. It would reap benefits for them in the medium to long term when markets start rallying again.
