Volatility and market fluctuation
The markets are known to be volatile. So, if you are looking to invest, volatility is an unavoidable factor. Volatility measures the risk and indicates how much and how quickly the value of an investment changes.
If the prices of a security fluctuate rapidly in a short time it is termed as high-volatility and if prices of a security fluctuate slowly in a longer time span it is called low-volatility. Trying to predict a stock’s volatility or timing a stock’s price can be very exhausting especially if you are a short-term trader. However, in a volatile market, traders have infinite opportunities to trade the swing, but the higher the volatility, the riskier the security.
Volatility exists in every market situation but over the long-term markets always have a tendency to recover. Let’s take, for example, the Lehman crisis in 2008, where the Sensex witnessed a crash of about 60 percent in one year, but 1.5 years later it jumped to 150 percent! Volatility can test your patience but in the end, does reward the long-term investors.
How can you limit the effects of volatility?
Once you have carefully placed both your long-term and short-term goals, you need to pick your schemes cautiously and ensure you have a well-diversified portfolio. Here is an investment strategy you should adopt.
Don’t time the market: Even market experts don’t time the market and recommend not to predict market movements, one wrong move can wipe out a substantial portion of your capital. Staying invested for the long-term will allow you to reap rewards from the market.
Pick your stocks wisely: Not all stocks have the potential to give you good returns, so choosing fundamentally strong stocks can help your portfolio grow. If your investment is right then you can reap rewards of compounding.
Stagger your investments: Investing via SIPs across sectors is a good investment strategy. A well-diversified portfolio helps maintain good balance when markets are volatile. Investing via SIPs can help you average out returns in the long-term.
Make friends with volatility: Over trying to time the market, you should invest at every dip, the strategy not only helps you average out your investment but protects you from timing the market. Markets are known to bounce back from any jerk it witnesses. If you remain invested you can benefit in the long-term.Based on both your long-term or short-term goals a tailor-made long-term strategy will help you sail smoothly through the volatile markets.