Opinion | How to deal with volatility effectively3 min read . Updated: 13 Aug 2018, 10:40 AM IST
What we are investing for and how long we will remain invested can help us deal with market volatility effectively
The past month has seen unprecedented volatility in stock prices. News flow kept raising serious doubts in our minds about emerging, small, and mid-sized companies while positive sentiment was taking the indices to all-time highs, with several index bellwether stocks crossing $100 billion in value. Most investors, perplexed by this sudden redux, have been feeling left out and are taking the brunt of the meltdown. Several investors who are in their first market cycle are feeling emotionally scarred.
The immediate challenge is to urgently respond to this situation. Investors must quickly learn to deal with this, and carry it into the future. A good starting point would be to acknowledge the connect between emotions and volatility. Emotions play on our psyche, influence our state of mind, and drive our investment behaviour. The influence of volatility on our emotions is also continuous.
Many investors claim to be unaffected by market volatility, but the truth is to the contrary. Every phase of market volatility teaches us lessons—old and new. But our response to the lessons force-fed to us by the markets are rather unpredictable. Our ability to receive harsh lessons varies from time to time.
Even age has a major bearing on our mindset. This makes handling one’s emotions during extreme market volatility the biggest challenge in investing. But there is no escape from learning new lessons in every market cycle. Volatility is an eternal teacher, and a constant in our lives. It has a continuous bearing on our decision making, investment responses and risk mitigation.
So, can we effectively deal with volatility? Yes, and the first step is clarity. What we are investing for and how long we will remain invested are determinants. They could be financial goals. Clarity allows us to focus on our goals and ignore market inconsistencies, though we will still have to deal with swinging emotions along the way.
Accepting and expecting volatility is a good follow-up point. Developing an approach to deal with associated emotions is the next step. Preparation is key, and the trick is to expect the unexpected. But that is hardly easy to do. The market’s volatility makes anticipation the most challenging part of investing. Volatility has the ability to bring out the emotional side in every investor.
When volatility rises, emotions tend to get the better of us. We are forced to wait for long periods for our decisions to deliver success. The wait may often be extended by intermittent volatility and this causes anxiety and trepidation. This problem is often caused and made worse by how we structure our timelines. We expect something positive to happen within a particular period, and usually it takes longer. Even when we expect something negative to happen, we are mostly wrong about the timing. The prolonged timelines can be seriously detrimental to our investment confidence. We must deal with ourselves and devise an effective way of managing our expectations through delays.
Investors shouldn’t think that dealing with emotions is restricted to the negative ones. We must also learn to deal with positive emotions. In fact, most of our problems arise from the casual way in which we deal with positive emotions. When volatility causes stock prices to spike, euphoria starts to set in. We feel light, happy, and successful. We are in a hurry to take stock of success, recalibrate, redirect and reallocate capital. When volatility takes markets even higher, there is an overwhelming shift of focus on success rather than risk. The positive impact of volatility on our portfolio is assumed to be natural. After all, we would have made investment choices diligently and spent time waiting for our choices to deliver. So, when superordinate returns show up, we assume that there is no hurry to respond and we often miss out on initiating a sensible investment response.
The best way to ensure that we deal with every situation equitably is to know what we want. Surprisingly, volatility often gives us what we want; it can be a positive catalyst too. When it gives us what we want, we must develop a mindset to quickly grab the opportunity. Taking control of success that arises from higher volatility is an under-appreciated aspect of investing. We must learn to condition our minds to take control of success and to capture the benefits of volatility in our investing.
The near-term challenge before us is to seize the right opportunities thrown our way due to increasing market volatility. It is important not to view this as investment failure. Instead, see it as a new beginning or a reset moment in your investing.
Shyam Sekhar is chief ideator and founder, iThought