An investment plan to counter volatile markets

When the markets are in turmoil like the current one, investors begin to feel despair. Of course, it's very difficult to digest and remain stoic in these troubling times especially when our investment from our hard-earned money reduces in value (albeit notional) drastically. Moreover, when the narrative across makes seem if the world is coming to an end, it doesn't help us to think and act rational.

Markets (of all assets) operate in cycles which could be comprehended form the past data or experiences but they're never going to be easy to deal with. These situations present behavioural challenges to the investors. The news about impending deteriorating future further amplifies panic and it's during these extreme pessimistic times, one should remain stable. The psychological pitfalls of market cycles are enormous but how to avoid these?

This is where an investment plan or a financial plan comes handy. This would be a stepwise rational approach, where one should consider their objective, the statement of 'why' one is investing. It's said that once you understand the 'why' of anything then the 'how' is figured out automatically. The draft of this vision should encompass the reason for the investment. Most of the times this also helps in avoiding certain investment vehicles as they don't fit to the objective.

The plan should be versatile and dynamic to the changing markets, at the same time, shouldn't be too finicky. As the market cycle turns against the tide, has the plan discounted these changes during the calculations or is there a plan to counter such circumstances? What if the actuals deviate much beyond the initial plan, how does one respond to? The former question is defied by a large extent through portfolio creation, asset allocation and diversification strategy. The latter is where no amount of pre-defined strategies work except the 'will' of the investor.

Of course, portfolio creation in tandem with the risk profile of an investor not only reduces the risk or align to the risk of the investor it also helps in deriving mental peace to the investor during volatile times. As the portfolio is less immune to the shocks especially from the psychological point of the investor, the investor remains confident of sailing through the trying period. One must understand that no situation remains same forever and as nature (economics) automatically balances out. Extrapolation of extreme states or events would only portray a wrong picture, even if the times are good.

Hence, it's very important to have the rationale for investing ahead of the actual execution. It could be sometimes as specific as building a corpus for down payment of a housing loan to amassing wealth for retirement. Defining this could help one to come up with timelines, avenues and thus the asset allocation. Overall, that forms the foresight for the investment journey.

Moreover, the plan needn't always be perfect and ideally it shouldn't be. It should be flexible enough to make desired changes yet remains focused on the goal or objective. The plan should capture the imagination of the investment philosophy so that it reflects the best of the investor. This near-truer representation bolsters the attitude towards overall savings and thus leads to a happier investment.

While the plan is designed to approach various goals, it could be revisited periodically or during changes to the goals to re-align. This ensures to get a grip on where the journey till then led to and how to approach going forward. In case of deviations, how to maneuver to get back to the original path. By describing such a process, it would avoid knee-jerk reactions to the market gyrations while also being open to considering any changes, if required.

The role of a financial planner or an advisor comes to the fore at these junctures where they could act as a speed bump in the train of thoughts an investor experiences. Investors could be well guided at these points so that they're on track to their goals.

(The author is a co-founder of 'Wealocity', a wealth management firm and could be reached at knk@wealocity.com)