Investor’s dilemma and approach in the volatile stock market
When the market has a secular upward movement, the retail investor feels confident of his skills and feels excited about his investments and probable return. Investor believes that market will continue to move higher and his returns will remain assured.
But this is far from reality; market moves are never unidirectional for long term. Factors such as global markets, government policy announcements, investments, expected GDP growth rate, interest rate, inflation trends, exchange rate, special global events (like Covid pandemic), liquidity etc. are at play at all times. Investors’ collective behavior will either pull it downwards or upwards depending upon its sentiment. When the investors are indecisive, it leads to volatility. Higher the indecisiveness, higher the volatility and higher would be the anxiety. Higher the anxiety, higher would be the irrational behavior of investors like exiting the market at lows, selling diamonds at low levels or buying duds at higher levels.
Prudent Investor can follow the below time tested principles to ride through the market volatility:
- Stock fundamental valuation is linked to the Company’s business performance and the business performance doesn’t change on the daily or weekly basis. Therefore, neglect the fluctuations in the stock prices.
- Develop understanding of the company’s business and its key performance drivers. As long as there is no change in those drivers and company’s strategic direction, there is no need to panic.
- Investor should desist from watching share prices on the daily / weekly basis. One should review the stock price vis-a-vis business performance on yearly basis. Regular watching the stock prices act against the individual will power to stay calm during the turbulent times.
- Few investors believe that if they don’t react to market volatility, they are passive. They need to understand that taking “No Action” is also an action and could be best in most situations.
- Stay away from the media noise about markets. Their commentary changes with the direction of the market. No one can predict the market direction in short term. Focus on the bigger picture that if the economy is growing and company is performing well then stock prices will move upwards in the long run.
- Refrain from “Selling” when there is fear in the market and buying when there is “Exuberance” in the market. Instead, use market extreme behaviors to the advantage of your portfolio. When there is fear (stock prices are much below fundamental valuations) buy good companies and build core “all weather portfolio”. When there is exuberance (stock prices are much above the fundamental valuations), trim positions with higher weightages, sell fundamental weak shares with lofty prices.
Trust above principles make your sail smooth in the volatile stock market situation…
Very insightful expressions. No action is also a wise action is a notable and deep observation.. So true indeed ! Kudos to the author for so nicely simplyfing the complex dynamics of share market.
Pl keep reinforcing these fundamentals on regular basis to keep the anxiety levels in check.. Thanks for this enlightenment . Cheers
I recently had the good fortune of reading your article regarding investment strategies. It was well-written.
You pointed out several things that I will remember for years to come. I look forward to reading your next informative work.
Regards,
Anurag
Very informative & practical points have been shared. Looking forward for information in future too.