Why market volatility could be your ally

Market volatility can induce fear and anxiety among investors, as wild stock price fluctuations unnerve even seasoned traders. This unease stems from the perception of volatility as an indication of uncertainty and risk. But what if we told you that you can plan and strategise to make the best of volatility in the financial market?

What is Volatility?

Market volatility, a crucial concept, measures price variation in an asset over time, often quantified as the standard deviation of these price movements. It gauges how much an investment's value deviates from its typical pattern, serving as a risk indicator for investors.

However, volatility extends beyond numbers; it's intertwined with human psychology. In times of market turmoil, fear and uncertainty often dominate, leading investors to panic and sell assets hastily to avoid further losses, thereby amplifying market volatility. Recognising the psychological dimension of volatility is crucial as it empowers investors to make rational decisions. Despite the fears that it often induces, experienced investors perceive it as an opportunity.

Causes of Volatility

Market volatility stems from various factors, that is often a combination of these elements:

• Economic Data and Events: Releases like employment reports, GDP figures, and inflation data can significantly impact market sentiment, causing volatility when they surprise investors.
  
  
• Global Events: Elections, geopolitical tensions, and trade disputes create uncertainty and affect global investor confidence, leading to short-term volatility spikes.
  
  
• Corporate Earnings: Company performance relative to expectations influences investor sentiment, causing stock prices to fluctuate.
  
  
• Investor Sentiment: The collective investor mood can swiftly shift from optimism to pessimism, driving market volatility, often driven by fear and greed.
  

Navigating volatility in the market

To understand why volatility can be advantageous, one should understand the four basic reasons.

1. First is Rupee-cost Averaging. This approach involves consistent investments of fixed amounts, regardless of market ups and downs, sidestepping the need to time the market and mitigating emotional decision-making. Consistently investing over time allows for asset accumulation without requiring a significant initial capital investment.
   
2. Second is disciplined long-term investment planning, which significantly increases the likelihood of achieving financial objectives. It's crucial to resist impulsive reactions to short-term market swings but rather stick to the plan over the long-term because a good investment plan takes into account the various scenarios that may take place down the road.
   
   
3. Third is employing the strategy of diversification. The merits of diversification come to the fore during market volatility. Spreading investments across various asset classes and sectors can cushion the impact of downturns in any one part of the portfolio.
   
   
4. And lastly, consulting a financial advisor. During volatile times, seeking guidance from a financial advisor proves to be invaluable. Advisors provide steady guidance, leveraging their expertise to help you make informed decisions. They can also assist in portfolio rebalancing and strategic adjustments as and when needed.
   
   

Use of Hybrid Strategies

As a means to help investors navigate volatility, mutual funds have brought forth dynamically managed asset allocation schemes. The aim of this offering is to allow investors make the most out of market volatility. Such a fund typically invests into two asset classes – equity and debt. In this offering, the fund manager endeavours to take a counter cyclical approach to investing which is buy more when the equity markets turn volatile or is available at a cheaper valuation and sell when the markets head higher and more the assets to debt. In this way, investors get to buy low, sell high and benefit out of intermittent market volatility.

To conclude, market downturns, while posing short-term challenges, offer long-term prospects for those with patience and strategy. Rather than letting fear dictate decisions during volatility, consider it a friend on your path to financial success.


Disclaimer: The article is authored by Chitra Sudhagar,Manager,Gain wealth. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class: