Why Is Volatility A Good Thing For Your Investment?

Volatility can be a good thing sometimes. It can be a gauge for the market performance or returns on your investments throughout the investing journey, according to Ananth Narayan, an all-time member of the Securities and Exchange Board of India (Sebi). “The most ubiquitous measure is actually something called volatility, and it becomes mathematical, so it gets a little confusing for the average investor. But volatility is trying to tell you how much the daily returns vary,” Narayan said during Outlook Money’s 40After40 Retirement Expo last Friday.

“Return is point-to-point. How much have you moved? Risk is how bumpy your journey was, and both are important. Do not de-emphasise one over the other. Both are equally important,” Narayan stressed.

Here are some steps to address market volatility.

Diversify Your Portfolio

Narayan said, “Diversify across equities, fixed income (assets), commodities, gold, real estate, currencies, and a whole bunch of asset classes, not just the one your distributor is selling to you.” He said diversification allows investors to absorb risks as each type of investment comes with different risks.

Asset allocation aims to differentiate the risks and cancel out each other’s risks, for example, determining the right debt-to-equity ratio and ensuring a proper mix of assets, such as gold and real estate.

Professional Help

Narayan advises that you must do a self-assessment to know your risk appetite. Only a person can decide for themselves how much risk they can digest. Professionals can further suggest which instruments should be used depending on your risk-taking ability.

Jumping In and Out of the Market

Pointing to people who jump in and out of the market often, Narayan said, “The more you trade, the less you make.” This behaviour relates to “people who trade more than necessary. While there are many successful traders who earn good profits, there are also those who overtrade and lose money,” Narayan added.

Rebalance Your Asset Allocation

Finally, Narayan stressed that re-balancing the portfolio is as important as asset allocation based on your life’s major events. It helps re-assess the funds you need and increase or decrease the allocation in a particular asset class based on your age, risk-taking capacity, and whether it is the time to invest or exit the market.