Why the stock market is so volatile and four crucial aspects to investing in the stock market in volatile times.
Long term investing gurus say volatility is good, but the question for a retail investor is – Why does the stock market have so much volatility and how to invest in such volatile times. Further, how to use the volatility in the market to your advantage.
So we will look into those questions one by one, and so first let’s look at what market has so much volatility and then we will see how to invest in volatile markets.
Why is Stock Market So Volatile?
Do you wonder why some news in the US has nothing related to India, and the Indian market corrects?
The question is, WHY?
Then everyone on TV says we live in a connected world.
The reality is the market is predicting the future. So it overshoots and undershoots on both extremes. So the market has volatility.
You will say – come on, Shabbir, you can explain it better. So let me try.
Let’s say a person is doing a job and earning money for a living. Next, he gives the money to his wife, who buys items for the month. Typically, the wife will buy things they need for the next 30 days.
Now, let us add a little twist to understand the market volatility. The wife will buy items for the distant future. That is, she purchases things they will need one year later.
She wants to buy everything cheap. So let’s say she wants wheat and rice. Ideally, if she expects the monsoon will not be normal, she will accumulate wheat and rice a lot more and well in advance.
Similarly, if there is news that the US will be importing an item she wants, then she will run to buy it before the price rises. On the contrary, if China dumps a thing she wants, she will wait for the price to correct before purchasing.
Market discounts future earning and growth. So every news in the world impacts the sentiments, so the market is volatile.
How to Invest in Volatile Times
Now we know why the market is volatile. So we have to use the volatility to our advantage and invest wisely.
So let me share how you can invest in the volatile stock market and take advantage of the volatile times.
Believe in Market Cycles
The most critical aspect of investing in the market is to believe in market cycles.
So, first, you have to believe that the market will overshoot on the upside and undershoot on the downside.
It means the market will have corrections, which will get over at some time.
So to be able to invest in the market in volatile times, one has to believe that when the correction is over, the market will recover.
So once you believe the market will stop correcting soon, you have to start investing in stocks that will recover faster after the correction.
You should always have a list of stocks where you want to invest or where you want to be adding more positions.
After an initial 10% correction, add more for every 5% correction. It works well for me and helps me increase the quantity of the stock I own higher.
I have done that for some of my stocks in my portfolio, especially Clean Science, where I initially invested at ₹2200+. Still, I kept accumulating small quantities under ₹2000 to ₹1750ish.
Invest in the Right Stocks
When I say keep adding, you should also keep in mind that the focus is to accumulate great companies.
It would be best if you had an investment checklist that should keep all the low-quality stocks out of your portfolio and, in volatile times, invest in great companies.
If you invest in companies that have fallen the most, you may not have the confidence to remain invested if they fall further.
However, if you invest in great companies with a proven track record, you will be confident of remaining invested and even add more once they fall.
So the most crucial aspect is to invest in the right stocks. The correction may allow you to invest at support levels for the stock, which may be the right price. Then if you can remain invested for the long term, you will have everything working for you, aka the right stock at the right price for the right time.
Rebalance the Portfolio
When the market was high flying, everything was rallying.
However, When the going gets tough, the tough get going.
Just an example, the market has seen a correction of 15%. But, on the other hand, page Industries, part of Saurabh Mukherjea’s portfolio, has only corrected 10% from its all-time high peak.
You should be able to book loss, take advantage of tax-loss harvesting, and move from stocks that aren’t as good as you thought they were to the tried and tested ones.
I know it’s tough to book losses, but you have to make those tough decisions.
Are you investing in the market in these volatile times? Share your thoughts in the comments. What you invest in is very important. So you can share the names of the stocks as well.
Remember, stocks mentioned in the article or even in the comments by others is to help understand the concept of how to invest in volatile times, and nothing is a recommendation to invest. It would help if you did your analysis before investing.