How would have Jack Bogle traded in these volatile markets?

In predictable markets you trade by instincts but in volatile markets you trade by principles. Let us understand how to devise a trading strategy in volatile markets.

Sep 30, 2020 08:09 IST India Infoline News Service

If the last one week was representative of the undertone of the market, it promises to display heavy volatility in coming weeks too. Trading in volatile markets is never simple because stop losses get triggered, bluest of blue chips corrects without reason and mid cap stocks get hammered. How to devise a trading strategy in volatile markets?

In predictable markets you trade by instincts but in volatile markets you trade by principles. Whether you are into equities or mutual funds, standard principles can guide you through. Who better to guide you through volatile market conditions than the legendary Jack Bogle?

Jack Bogle model for volatile markets


Among many achievements, the legendary Jack Bogle revolutionized investing. For Bogle, investing and trading was all about principles. If principles are sound then external market volatility hardly mattered. For the uninitiated, Bogle introduced the concept of passive investing and index funds to the world.The fund that he founded, Vanguard, manages over $5 trillion in AUM;most managed passively.

Jack Bogle underlined that investing can only be profitable if the interests of the sponsors, trustees, fund managers and unit holders were aligned. As a concept, index funds not only worked because of their simplicity but they also drove down costs substantially. It is estimated (by Buffett himself) that Bogle saved close to $1 trillion for American savers in fees payable. That surely makes Bogle the most qualified to talk about trading and investing in these volatile markets. Here are seven principles; Bogle would have typically offered.

1) In any crisis, never throw away your quality stocks

Bogle was the first fund manager to remind investors that the biggest risk faced by investors was not short-term volatility at all. On the other hand, the biggest risk was not earning sufficient return on their capital as it accumulated. Compounding can only work if you are invested in good quality stocks. If you have good stocks, never swap them for bad stocks; more so in the midst of volatile market.

2) Remember, power of compounding is a force multiplier

We have heard of the wisdom of starting early so our investments can grow. Bogle was the first star investment guru to tell investors that after the fifth year, the return on returns are bigger than your returns on principal. This keeps growing exponentially and creates wealth. That is why, even in volatile markets it is important stay invested. Volatility will go away, compounding will continue.

3) Never trade or invest impulsively in markets

As much as Bogle was a strong believer in index-based investing for retail investors, he was also a strong votary of investing based on fundamentals. The head has got to rule over the heart so don’t get carried away by fear or greed. Bogle advises to treat media tips and even research reports with scepticism. It is important to eliminate emotions in the midst of volatile markets.

4) Market patterns change, your goals don’t

Bogle would have typically asked you to stick to your financial plan. Whether the Sensex touches 30,000 or 45,000, your long term goals don’t change. It is essential that you first create a long-term financial plan.Secondly, it is equally important to stick to the plan. Stay the course is the mantra in volatile markets. If expectations are rational, you will not keep switching strategies.

5) Diversification is a basic necessity of investment strategy

Never put all your eggs in one basket, is an age old piece of investment wisdom. Bogle always emphasised that it was essential to spread assets across return classes, risk classes and also tax classes. As Bogle said, sensible diversification is all about maximizing your risk-adjusted returns. These volatile markets only underline the importance of diversification and you should use volatile conditions to realign your holdings.

6) More often than not, indices outperform fund managers

Continuing on the topic of diversification, it is evident that you must also spread your assets between active and passive assets. In the US markets, diversified indices like S&P500 have beaten over 80% of fund managers. We are seeingthat trend emerge in India too. Bogle would have clearly said that if you are not satisfied with active strategies, just stick to a passive index fund. That is really smart!

7) Cut corners when it comes to investment costs

If you never bothered about investment costs, this is the time to worry about it. IF you are an equity investor, check if a discount broker will be a better choice. Can a direct fund not help you meet your mutual fund needs and also save commission costs? You must take a call when passive is better than active. Volatility is the time to cut corners.

While there is no magic mantra for volatile markets, some of the core principles of Jack Bogle can surely help you sail through these difficult market conditions.

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