A lot of us are fearful when it comes to watching a horror movie. But someone who has been operating in the share market will tell you that it is no better than a horror movie. Yes, markets can be fearful, particularly during times when it is witnessing a crash or during an economic turmoil or financial crisis, etc. But if you crack the code to operate under such a situation, there is no need to fear. Initially let's explore the meaning of market volatility,
So, what basically is the Stock Market Volatility?
Volatility can be simply defined as the rate at which the prices of a particular stock fluctuates. The higher the market volatility, the higher is the risk. At times of volatility, the market becomes highly unpredictable, and nothing seems to be certain. The prices constantly move up or down, making you feel like traveling on a bad bumpy road with no idea as to where the pitfall will be. Under such a case, an investor will find it difficult to take any calculated steps or decisions. A few steps to follow during these times are as follows:
Pursue the path of patience
If someone you are fighting with challenges you to touch a hot rod, you would probably give it a thought for at least a split second, despite knowing that it is reckless. It is not your foolishness that makes you do that. But it is your anger which makes you do that. That's why we are advised to relax when we are extremely sad or angry and then go ahead with our task because emotion has a way of messing with our head and clouding our decisions.
Following such decisions can easily cost you more than you think. Thus, being cautious and holding onto patience is extremely important. Share market is one of the many areas where caution has to be used. It is where our emotions play us, getting home huge losses, particularly during a catastrophe.
During a mishap or any serious economic troubles, you will notice a high amount of market volatility. The prices of stocks and various financial products may either reach great highs or see drastic falls. Another important thing which you will find is your heartbeat following the same path. Why does this happen? And what can you do about it?
So when you see your portfolio incurring huge losses, you will have an urge to act out immediately. Even the most competent investor can easily become prey to such emotions. You will want to sell out all your holdings in order to escape from further losses. Or, simply bag everything in fear of losing an opportunity. But the question here is whether this activity is good for your portfolio or not?
The answer will be a big no. To be honest, this might be the worst decision of your life. Selling of stocks immediately after seeing the losses will make the bruises, which are temporary, permanent. These are the times where you have to control your feelings and act rationally. You should relax and stop following the crowd or acting in a frenzy. Patience is the best tool you can use. It would be best if you analyzed the various options and their consequences. Don't, and upon a decision without doing your part of the research.
Don't miss out on the golden opportunity in Market Volatility
These are the times where you can buy a good stock at a discounted rate. On the other hand, sell the stocks you held at a far higher price. Hence, use this opportunity to either reallocate or rethink your holdings or portfolio. However, when the market crashes, both good and bad stocks fall, making it highly difficult to differentiate. Hence, prioritize quality over price. For instance, owing to the pandemic, the stocks were discounted by 20-30% in the month of March. An intelligent investor will never miss out on such an opportunity.
Control your urge to act out
I get it. It might be highly difficult for you to control your emotions. But you are left with no other option. Suppress your fear or anger or anxiety and ensure that it does not come in the way while arriving at conclusions. Further, don't blindly follow the optimism or pessimism is prevailing in the market. Ensure a logical reason backs it. Do not be afraid to turn back to your fundamentals. It is never wrong to cross-check your judgments, especially when it's your hard-earned money at stake.
Best time to use the Cigar Butt approach
Say a business which is performing very badly has depreciated in its value. It has now reached a value less than the intrinsic value. In that case, if you buy them, you will have the last chance to profit from the small price hike it might experience. This is known as the Cigar Butt approach. Say, for example, the shares of company XYZ are performing very badly. Its shares tanked by 20% from its intrinsic value of Rs.100. And you bought one share of it at 80. Suddenly, there was a change in the upper management level, which made the share prices hike to a 90. Hence, you will receive a profit of Rs.10. This approach should be used with caution and might require enough and more knowledge about the company. It is highly advisable for novice investors to stay away from such a method. While many market gurus followed this method, they seemed to discard it over time.
What else should you do?
- During these times, we panic and are ultimately forced to think about the short term rather than the longterm investment. When you are thinking about the long term, you will have less space for making mistakes.
- Further, evaluate your risk tolerance. Consider selling only if you are a person who is facing extreme liquidity crunch or financial trouble. Or otherwise, it is wise to give up on that option. The way you react to the crisis or market changes must highly depend on your risk-taking ability.
- Don't buy in a rush or simply spill all your beans at once. You can never judge the bottom of the market. The 2008 crisis made the market saw its bottom more than once. Hence, spending all your money at one shot will leave you stranded when the opportunity knocks again.
- Analyzing the past is always helpful. Because history always has a tendency to repeat itself. And the sharing markets never fail to prove this.
An intelligent investor sees opportunity amongst pessimism and fears optimism. Today, a little patience can save you from making deadly mistakes that you might repent for in the days to come. Let's worship patience when it comes to stock markets? Can we?