How To Stay Invested During Testing Times

The very rationale of asset allocation is to counter the volatility and not the other way round. So, one needn’t ideally make allocation calls during volatile times if they’d followed this pro-cess at the first place

As markets have begun to correct, there’s noise gaining over the thought in the investors’ minds. Many have begun to question their approach, some began to act hastily by withdrawing their investments, reducing their equity exposure and even stopping their systematic investments. While to act in fear provides them gratification in the short-term if there’s further correction in the markets, it could also make them difficult to re-participate in the expansion phase.

Understand that market corrections are inevitable part of investing and the declines not only create despair but could alter our behavior. The success of their decision to stay away from the markets (if markets further) fuels their understanding of market behavior while also increases their risk averseness. The human mind is wired to seek immediate relief from uncertainty and potential loss. Market corrections, while uncomfortable, are a feature of equity markets and are typically followed by phases of recovery and expansion.

Many investors believe they can exit during a downturn to re-enter when markets stabilise. However, history has shown that timing the market is incredibly difficult. Also, recoveries could be often swift and unpredictable. Data also shows that missing out just a few of the best-performing days can significantly impair long-term returns. Studies suggest that staying invested during the volatile periods offer better results than attempting to time the market.

This is where asset allocation becomes critical for successful investing. The portfolio should have an asset allocation that aligns with their risk appetite, goals and timelines than create an allocation based on the market opportunities. The very rationale of asset allocation is to counter the volatility and not the other way round. So, one needn’t ideally make allocation calls during volatile times if they’d followed this process at the first place. It’s when investors run after fads, themes of the day, etc. would they have to relook at their allocation mix.

This could be to the overall assets like debt, equity, gold, etc. or even within the asset class like large, mid, small-cap, etc. in equities. Investors could benefit from reallocation strategies if they’d already drawn out a detailed asset allocation at the beginning. Whenever the share of an asset increases beyond the original threshold then that the portfolio could be realigned by shaving off the excess to allocate to other assets. This could become a regular interval in a one-sided market but wouldn’t give the perspirations due to market volatilities. The other aspects investors to consider to not give away to the market whims are the following.

Adopt a long-term perspective: When allocating to riskier assets like equities, investors must come to terms with the volatility associated with these assets and accordingly build in the long-term commitment. This curves the sharp corrections which would become manageable or negligible in the long-term. Stick to Systematic or staggered investments: The very idea of a systematic or staggered allocation to these riskier assets is to cost-average the purchases. It’s more important that the investor continue their existing investment contributions so that they could average the acquisition cost better and ride out higher returns when the tide turns.

Avoid emotional decisions: It’s important to take informed and rational decisions in money matters, ideally assisted by a qualified professional for objective decision making while focusing on long-term wealth creation.

Diversification: A well-diversified portfolio through asset allocation is a must so that the market vagaries are less felt by the investors paving way for an uninterrupted wealth building journey.

These situations not only test investor’s faith and patience but also provide opportunities. At these times, investors should remain focused on their financial goals and take strength from the past market’s resilience.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])