Like it or not, market volatility is an inevitable part of investing. When losses appear to be looming after touching the highs, it is understandable that
investor’s make emotional decisions to cut losses.
In mid-March 2020, many investors were tempted to flee for the exit when the Nifty 50 Index fell by 38.4% from its peak. However, investors who
remained invested saw the index rebound 13.6% in the following three days. Thereby, as an advisor, you can create a huge impact on your investors’
portfolio by correcting their behavioural mistakes.
Your first defence against these mistakes is to craft a diversified portfolio across different asset classes that matches your investors’ investment
horizon and risk tolerance. During times of market volatility, while the risky investments - equities (domestic/global) may fall, the overall portfolio
performance may not be so badly impacted.
A diversified portfolio is built of complementary assets that don’t usually perform the same way. This in turn smooths out the returns in volatile
times and helps mitigate risk in the portfolio.
Consider an example of a multi-asset portfolio with allocation to equity, international equity, fixed income, and gold.
As seen from the above graphs, a multi-asset portfolio would have been
far more resilient through volatile times compared to a pure equity
portfolio.
Actionable Insights through Volatile times
Market volatility isn’t always bad news. Though it may be tempting to
concentrate on losses caused by price fluctuations, there may be
opportunities for gains.
1. Practically speaking, if an investor’s personal situation really hasn’t
changed, then staying the course and riding through these periods of
volatility is the logical course
2. Rupee cost averaging, the practice of doing a small top-up in your
overall portfolio during volatile times
3. Selling some of your loss-making investments, a practice called taxloss harvesting may prove beneficial. This strategy can help you offset
the taxes on your investment gains
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