Avoid these Investing Mistakes to Protect Your Portfolio in a Volatile Market

May 21, 2022

Listen to Avoid these Investing Mistakes to Protect Your Portfolio in a Volatile Market

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Investors have been avoiding risk assets due to a confluence of intertwining factors. They include persistent high inflation, slow economic growth, increased geopolitical uncertainty due to war between Russia-Ukraine, ongoing supply chain issues from the pandemic and, the Reserve Bank of India's recently announced interest rate hike.

The fact that markets have been volatile has weakened the investor sentiment. Given the headwinds in play, you may lead to making some costly investing mistakes. When markets fall sharply, it's normal for investors to panic. You know the old saying "buy low, sell high." Well, panic can easily make you do just the opposite.

As per historical data, markets have plummeted in past in reaction to such situations - be it wars, pandemics, terrorist attacks, financial crisis, scams, or others--and then recovered. Despite these unpredictable occurrences, one thing remained constant: the growth of equity markets. As a result, even if some investors had invested at the peak, such as before the global financial crisis or the COVID-19 pandemic, their wealth would have compounded over time.

The Indian equity market is known for its volatile nature, and events like the Russia-Ukraine war and COVID-19 pandemic can rattle the market even more than usual. It is but human to panic and feel an urge to act quickly on your investments, especially on the selling out. This article attempts to help you to prevent common investing mistakes that many individuals make amidst a volatile market.

Even the most experienced investors are tested by a volatile market scenario such as the one currently in play. Needless to say, a situation like high volatility becomes even more challenging for not-so-experienced investors. To redeem your investments during volatile market scenario has never been a good idea. As a result, investors should avoid making any investment decisions in panic.

Given that, on the other hand, investors who may be tempted to make a quick buck in the current market situation should remember that it is critical to adhere to the same investment principles as in normal market conditions, namely, focus on scheme suitability, invest for the long term, and opt for a quality portfolio.

It's been historically proven that a quality portfolio always recovers ground loss. To safeguard your portfolio from unfavourable impact, it is critical to put market meltdowns in right perspective and avoid any investing mistakes.

Here are a few investing mistakes you should avoid to protect your portfolio during volatile markets.

Mistake #1 - Do Not Invest in Panic to Cover Losses

In a volatile market, the basic human instinct will make you want to invest in new stocks or mutual fund units as soon as you experience significant losses. In most cases, novice investors panic-sell or panic-buy their stocks as a knee-jerk reaction to counter their diminishing portfolio. If you sell in a panic, you risk missing out on a great investment opportunity in the future. Furthermore, if you panic-buy, you may wind up with something that is only temporary and does not add value to your portfolio.

In a volatile market, many investors make this typical investing mistake. Therefore, avoid falling into such traps. Invest in only those stocks which are capable of boosting your portfolio in the future, essentially the blue-chip and large caps.

Avoid these Investing Mistakes to Protect Your Portfolio in a Volatile Market
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Mistake #2 - Do Not Exit the Market

When we look back at various market phases, it has eventually bounced back each time it faces a slump. Most individual investors, on the other hand, lose faith in the market after experiencing excessive volatility as a result of dynamic market conditions. So, an investor should not sell their investment because they are concerned about a possible decline. Although prices may decline in the short term, historical experience shows that they will eventually recover.

Market volatility should not make you think about exiting from the equity asset class due to its risky nature. Your investments are for the long term, and market turbulence is just transitory. If you stay put in the market, you'll be able to take advantage of the inevitable rally. When the market recovers, those who continue to invest on a regular basis will benefit the most. For instance, when the COVID-19 pandemic hit India and markets witnessed all-time lows, many investors withdrew from equity. Markets rewarded those who stayed invested when the rally started. As a result, do not exit your investments when the market is volatile.

Mistake #3 - Failing to Review your Portfolio

The fall in equity portfolio value during the volatile markets, along with the negative news flow, adds to the anxiety of an investor. Remember, spur-of-the-moment decisions, based on current market trends, can prove to be very costly.

When your portfolio is shrinking, it's preferable not to think about new strategies. Instead, perform a portfolio review and analyse your assets using a variety of quantitative and qualitative parameters. If necessary, you can rebalance your portfolio.

Analyze your investment portfolio's health and then check to see if you need to exit a specific stock, mutual fund or ETF or do you need to top up your investments. The equity market might be down due to the war crisis. But other asset classes in the commodity segment like gold etc. have seen their values rise. So review your investment portfolio and check to see if your allocation to other asset classes needs any further investment or shifting.

 

Mistake #4 - Lack of Diversification

Investors often think they can maximize returns by taking a large investment exposure in a certain asset class, a particular security or sector. This is a mistake. Even though the equity market promises to offer better returns compared with any other asset class, as the saying goes, do not put all your eggs in one basket.

To safeguard from potential events as discussed above, diversify your portfolio. A lot of factors are taken into account when an asset allocation plan is made. Your portfolio should include equity, bonds, real estate, gold, etc. you should invest within each asset classes according to your risk appetite.

Diversification emphasises risk management and adds value to your investment portfolio by reducing the connection between different asset classes. In other words, no two asset classes perform in the same way, and diversification reduces your portfolio's total risk in a volatile market.

Not diversifying, however, will position your hard-earned money at extreme risk and a concentrated investment with allocation to a particular asset class could negatively affect your entire portfolio, and, therefore, your financial wellbeing. Diversification allows you to build a well-balanced portfolio that can withstand any storm. As a result, market fluctuations should have no impact on you.

During a volatile market, it may be a useful investment strategy to keep idle cash in liquid funds and then utilise STP (Systematic Transfer Plan) to transfer to index funds or other equity funds based on your risk appetite and prevailing market conditions.

Mistake #5 - Don't Discontinue your SIPs

Instead of timing the market, time your investments by doing regular investments through SIPs. Often, investors stop contributing towards their long-term Systematic Investment Plan when they witness a slump in the indices.

Macroeconomic repercussions such as the geopolitical tension between Russia and Ukraine has resulted in a strong price drop in the equity markets. These kinds of events are short lived but can lead to market volatility. These unpredictable times are ideal for investing. Technically, investors should buy more of worthy mutual fund units when the prices have slashed. Earn those extra units at lower price (NAV) and reap the gains when the market is at the peak.

Investors should focus on asset allocation and build long-term positions using the market volatility. They should continue with SIPs as they offer the benefit of rupee cost averaging, which works the best in times of market volatility. While the conflict is a short-term event, an equity investor is generally someone who has invested for the long run.

Keep in mind that today's losses might be offset by future gains; volatile markets are unpleasant but only temporary. You can always overcome your losses if you hold worthy investments and not panic.

To conclude...

Making mistakes is an inevitable part of the investing process. Knowing what they are, when you commit them, and how to avoid them will aid you to succeed as an investor. Investing can be a rollercoaster ride at times and can cause you to panic amidst volatile market scenarios.

To avoid committing the mistakes above, you can consult with a financial expert or enhance your financial knowledge with finance literacy courses to make informed investment decisions. Always remember to stay prudent with your investments and never panic during a turbulent market. Keep your investment plans visible and active instead.

The key, therefore, is to keep focus on the long-term investment goals and to continue investing in an asset class like equity, irrespective of the market condition.

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Warm Regards,
Mitali Dhoke
Jr. Research Analyst



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