Nilesh Shah, managing director of Kotak Mahindra Bank highlighted some of the typical obstacles that investors face in their retirement planning at the Outlook Money 40After40 Retirement Expo currently underway in Mumbai.
Shah said though it’s a challenge to survive in an ever-changing market, it can be accomplished. There are two sole ways to tackle market volatility, luck and preparedness, he said. He added that one should not let short-term fluctuation affect one’s decision-making, as they lead to long-term losses. He also classified market investors into three broad categories based on their response to the market conditions.
He suggested some key strategies to navigate through market volatility.
Yamaguchi’s Luck or Dravid’s Receptivity
Shah drew two examples for managing market volatility, one from Yamaguchi, a well-known two-time survivor of nuclear attack at both Hiroshima and Nagasaki. Drawing a parallel between both, Shah said that to survive market fluctuations luck can be useful like in Yamaguchi’s case.
The other example he cited was of Rahul Dravid, a legendary cricketer and one of the world’s greatest batsman. Dravid’s preparedness and receptivity are important qualities one can take inspiration from to overcome frequent market changes.
Strategies To Navigate Market Volatility
Shah said market volatility can be unsettling, but with the right strategies, investors can navigate through it and even capitalise on the fluctuations. Here are some ways.
Expand Investment Horizon: One of the primary strategies for managing volatility is to extend the investment horizon. Short-term market fluctuations are inevitable, but adopting a long-term perspective will help investors ride out the ups and downs, thus reducing the impact of short-term volatility.
Understand Your Risk Appetite: Another crucial strategy is risk appetite measurement. Understanding your tolerance for risk will allow you to make informed decisions that aligns with your financial goals. Those with a higher risk appetite may be comfortable with more aggressive investments, while conservative investors might prefer lower-risk options.
Asset Allocation: Asset allocation is also crucial in managing volatility. By diversifying investments across various asset classes, such as debt, equity, and gold, investors can mitigate risk. This diversification balances out the potential losses from one asset class with gains from another.
Disciplined Investing: Maintaining a disciplined approach, such as investing regularly through systematic investment plans (SIPs), can help investors manage volatility. Regular contributions create a smooth investment path, regardless of market fluctuations.
Market Condition Management: Lastly, one should be able to respond to market conditions. Like a cricketer facing different deliveries, investors need to be adaptable and receptive, seizing opportunities when they arise.
Classification Of Investors
He classified investors into three categories based on investing habits during a crunch or a difficult market situation, such as the Covid-19 pandemic. This classification refers to their investment styles on the basis of their response to the market, which is carried out by a litmus test, he said.
The three categories are aggressive, conservative and average risk taker, he added.
Aggressive Investor
He said an aggressive investor thinks of the long term and does not get affected by short-term fluctuation of the market. They can see the bigger picture of the market and may estimate the results in advance. An investor who buys shares despite volatility, such as the Covid downturn, is classified aggressive investor as they are willing to take more risks, said Shah.
Conservative Investor
Shah described a conservative investor as someone who usually sells share and has a small risk appetite, especially during fluctuations, such as the Covid downturn. A conservative investor may be willing to take risks for higher returns, but usually avoids them in difficult situations, choosing to preserve the existing capital over potential growth during market fluctuations.
Average Risk Taker
An average risk taker, according to Shah is one who takes moderate and calculated risks like continuing with SIPs even when the market is fluctuating. They have a balanced approach and continue investment while adjusting their risk exposure.
