Tips for navigating through volatile markets

WHAT IS MARKET VOLATILITY?Volatility is a phenomenon wherein markets experience uncertainty resulting in bouts of upwards and downwards movements in index levels. Volatility is often described as the “rate and magnitude of changes in prices” and in finance parlance is often referred to as risk.
CHALLENGING MARKET CONDITIONS
While no investment strategy guarantees positive returns across all time frames, one can take some simple yet effective steps to ensure they are able to navigate through market volatility in a planned and process oriented manner:
STAY INVESTED:
Watching one’s portfolio returns fall is a heart stopping event for any investor. However, one of the best ways to safeguard your investments from being affected by market volatility would be to avoid taking any action. This means staying invested for the long-term and not paying attention to short term fluctuations.
ASSET ALLOCATION CRUCIAL:
 One should begin by defining one’s financial goals, risk appetite and time horizon; followed by careful asset allocation plan which becomes the basic building block to achieve the financial goals in the required time frame.
 DIVERSIFICATION IS KEY:
most essential component of asset allocation is to diversify one’s portfolio. Diversification is the process of spreading one’s investments across different asset classes. This ensures that one’s portfolio is not exposed to the risks of a single asset class and at the same is able to take advantage of the upside witnessed in different asset classes at different points in time. Invest through equity mutual funds. Exposure to stock markets through mutual funds is a convenient, affordable and prudent way for retail investors, since mutual funds offer you opportunity to avail the services of expert fund managers at marginal cost.
 SIP ROUTE:
Volatile markets result in fall in stock prices more due to market conditions rather than business fundamentals. Investing through SIPs helps one take advantage of market volatility since one is able to purchase more units of the scheme when markets fall and less units when markets rise thereby averaging the purchase cost. This leaves the investment with reasonable scope to generate sizeable returns when a rebound occurs.

Volatility is an inherent characteristic of stock markets. Instead of getting perturbed by the same, investors would do well to adopt the above measures and thereby craft their investment portfolio in a manner that it is armed with all the right ingredients to take advantage of market volatility and thereby deliver superior returns in the long term

Which is why the real winner is neither Stock Bulls nor Gold Bugs

Since the gold standard was completely abandoned in 1971, story goes something like this…

1972-1980
Gold Return: +1256%
S&P 500 Return: +97%
Narrative: Gold is the best investment in the world, and will continue to be so forever. There is hyperinflation in the U.S. and a secular stagnation in real growth.

1981-1999
Gold Return: -51%
S&P 500 Return: +1915%
Narrative: Stocks are the greatest investment the world has ever known, and will continue to be so. The internet age has forever changed investing returns and valuations; there is no upward limit to the growth in stocks in the coming years.

2000-2011
Gold Return: +443%
S&P 500 Return: +7%
Narrative: Stock investors have suffered through two 50% bear markets while Gold has more than quintupled. These are deflationary, depression-like conditions and only Gold can protect investors from what’s to come.

2012-2018
Gold Return: -22%
S&P 500 Return: +157%
Narrative: We’re in a Goldilocks period of low inflation and easy money. This is unbelievably bullish for stocks and very bad for Gold.

Overall, since 1972, the S&P 500 has had a higher return (10.6% vs. 7.4% for Gold) with lower annualized volatility (15.0% vs. 19.8% for Gold).
On this basis, Stock Market Bulls would say equities are the better long-term investment. Agreed, but how many equity investors would be willing to sit through an 11-year period (2000-11) with essentially no return and two 50+% drawdowns in between? Very few, just as there are very few Gold Bugs who would sit through a 19-year period (1980-1999) where their investment was cut in half.
Which is why the real winner is neither Stock Bulls nor Gold Bugs. It is the investor who can actually remain invested through tough times in a single asset class by maintaining a diversified portfolio of multiple assets: stocks, bonds, real estate, commodities, and alternative investments. Combining uncorrelated assets has been shown to reduce overall portfolio volatility and improve risk-adjusted returns.

Do you need a financial adviser?

When your financial future is at stake, don't adopt a laissez-faire attitude. And don't underestimate the importance of a financial adviser.

I recently had a chat with my relationship manager at the bank, or RM as they are commonly acronymed. When he mentioned a few funds that he believed were good investments, I surprisingly noted the omission of Mirae Asset equity funds. I went on to name Mirae Asset Emerging Bluechip and Mirae Asset India Equity, both rated Silver by Morningstar’s analyst. His ludicrous response: “I have never heard of Mirae Asset”. This post is not about the efficiency of RMs. But the above incident got me thinking about the importance of financial planning and the immense role financial advisers play. It is quite astonishing how many individuals adopt a laissez-faire attitude towards their investments. A year ago, The Star interviewed Susan Latremoille, director of wealth management at Richardson GMP and author of The Rich Life – Managing Wealth and Purpose. She expressed complete bafflement at how individuals with sizeable portfolios brag about managing their own investments. Her response is epic: “Do you cut your own hair? Do you fill your own teeth? Do you get underneath the car and change the brakes? You screw up with your money in your earning years, there are no do-overs,” she warns ominously, but is bang on. I have nothing against bank RMs. But I would never make the mistake of relying solely on them to help build a portfolio. Remember, in most cases they do not have the expertise to deal with holistic financial planning. They focus only on your investment portfolio. On the other hand, a financial adviser knows investments, but investment selection and portfolio monitoring are not all he does. He also has the expertise to help you set and quantify financial goals, draw up a plan to pay down debt, determine your insurance needs, figure out how much of an emergency fund you need, and provide you a clear understanding of the risk you are capable of incurring. Neither do I have anything against Do-It-Yourself planning, or DIY (another acronym). But assistance from a professional adviser can be well worth the time and money. The perspective and objectivity they bring to the complete financial picture – investments, insurance, debt, estate planning, while using your savings goals as a frame of reference, cannot be overestimated. A big problem with individuals who opt for the DIY route, is that they solicit advice from relatives, colleagues and friends. However well meaning all of them are, they would be clueless about the nuances. An investment which may suit them could be disastrous for you. Their needs, their goals and risk appetite would, in all probability, be vastly different from yours. And by creating a portfolio based on their suggestions, you would end up with a haphazard mess. Whether you are extremely prolific with your investments or a complete ignoramus, here are 8 questions you need to get some amount of clarity on before you approach an adviser. Are you seeking help with your entire financial life? Which means you would need help with asset allocation, determining the insurance needed, deciding which investments to opt for and quantifying and putting a time frame to your goals. Are you seeking help only with your investment portfolio or a specific issue? You have everything all sorted out but just need to know which specific funds to invest in. Are you looking for a one-time consultancy or do you need periodic help and ongoing assistance? How hands-on and hands-off do you wish to be? Or is it almost complete delegation? Are you comfortable with technology or prefer regular face-to-face interaction? What is it that you would like to accomplish with a financial adviser? If you have answered the above questions, you will be able to articulate your answer much more clearly. Is there any specific investment philosophy you would like your adviser to employ? Are you open to change if provided with a sound rationale? What is your most important financial concern? Over the week, we shall be tackling this subject in greater detail.

Source: www.morningstar.in