Investing in volatile times
Markets have been extremely volatile in the last two or three days. There has been a sharp decline in stocks especially in the mid and small caps. This is a feature of investing in such stocks. The ride is bumpy but has better longer term rewards.
In such a volatile market environment, what should an investor do?
The market can do one of three things at any time.
- It can go up
- It can go sideways (consolidate)
- It can go down
The probability of markets going up or down linearly is usually very low. That means you will not find stocks going up every day for very long. Every few days, it will correct or go sideways.
When markets are going down very rapidly, you again have three choices:
1. Do nothing
My default position is to do nothing if I have conviction in the stock(s) that I am holding. Exactly like I do nothing when stocks are going sharply up. Most of the time doing nothing works to your advantage. The problem with investors is they are mostly looking for action. They are glued to their mobiles checking the broker account or moneycontrol portfolio and this creates an itch to do something at all times. The other problem is they don’t have any conviction in the stocks they have bought because usually it is based on hearing a tip from some random person (and that includes analysts on TV, Twitter, YouTube, Telegram etc). So, a person who has very little conviction will be the first to throw in the towel when the going gets tough.
2. Sell (trigger your stop losses)
The next course of action I think of doing is to cut losses and triggering my stops. This is because I usually do not want to fight with the market. The market can decide to behave completely contrary to what I expect it to do. I respect both my capital and time. But this also means that you need to give a certain amount of breathing room for your stocks to bounce up and down without taking you out of your position.
3. Buy (averaging)
The last option for me is to buy. And 99% of buying is if I am averaging up. I have stopped averaging down with only one exception – when I am in building a position.
If I have cash and the market falls and I wish to enter what do I do?
First is to look at my portfolio or my watchlist and see if there is any stock where the allocation is lesser than what I wish. If so, then I top it up.
The other aspect I do is I will divide my capital to be deployed into 4-5 chunks and then use that every day the market goes down.
In case my allocations are as they should be, and still I have additional capital to deploy, then I will deploy it across all the stocks in my portfolio.
If some stocks fall more than others should I buy more of those?
Only if there is very high conviction in those stocks. Currently, the market is doing a sector rotation every few months and stocks or industries that have done really well see more correction (both price and time-wise). For example, PSU stocks, railways and defence sectors have seen more severe falls than other sectors in the last three days. It is always prudent to let a stock stabilise before jumping in. That may mean you buy higher than the lowest point. But it also means the probabilities are in your favour.
It is results season, so if some stocks fall more based on their results, should I buy more of those?
These are two separate decisions. Do not club them into one. Whether you want to buy a stock based on its results is a separate decision. If you think the results are bad and you wish to exit, then do so.
Always keep in mind the basic tenet of doing nothing if nothing much has changed that warrants action.
SIP is the way to go
Short, sharp corrections are par for the course in a bull market. One of the best ways to invest in an uptrending market is to do a SIP. If you are buying stocks yourself, buy on the days the markets are down. You don’t have to rush in to buy everything in one day. There will always be opportunities in the market.
With a regular SIP mode of investing, you will be better psychologically positioned than investing in a lump sum.
In Summary
When markets are volatile, it is worthwhile to remember these basic tenets:
- Do nothing
- Sell if you stop losses are triggered. sometimes, partial selling is a good option. Here again, my maxim of “When in doubt, sell half” comes in handy.
- But if you have cash. Spread out your buying. And let the market and stocks settle down to an extent before buying.
- If all this sounds complicated, just stick to a monthly SIP mode of investing and keep a long term orientation and you will come out fine.
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