The stock market has been highly volatile over the last few days. I firmly believe that corrections are a part and parcel of stock markets and one should not get unduly perturbed by these movements. Given the scenario, it is ideal that investors should stay put through this period of volatility and even look at new buying opportunities.
Market corrections are fairly regular occurrences and signal a healthy market cycle. Here’s how you can protect yourself from volatility by investing systematically with patience and discipline.
One, as an investor one should not time the market but invest time in the market. Equity as an asset class, needs a typical holding period of 5 years on the lower side, while they work best when held for an even longer period of time and therefore 7 to 10 years must be the investment horizon.
Two, by definition a small-cap portfolio is riskier than a mid-cap portfolio, which in turn is riskier than a large cap portfolio. Investors opt for a small-cap or a mid-cap portfolio strongly believing that higher the risks, higher the rewards. In such markets, you should not be perturbed as these higher returns manifest only over a long period of time.
Three, in India, over the years, we have consistently experienced unprecedented economic events and we not only survived, but advanced and thrived. Events like Asian economic crisis, Pokhran blast, Harshad Mehta scam, internet bubble, Ketan Parekh scam, market collapse in 2004, September 11 attack, parliament attack and the collapse of Lehman Brothers had led to major dip in the stock market. And every time, the markets have gained its resilience and continued their upward journey - simply because the underlying economy was growing. Even today, India is already a USD 2.6 trillion economy and is well on track to become a USD 5 trillion economy.
Four, at times like this, investors are ought to be tempted to cancel their SIP, but I wish to remind you the adage “Buy Low Sell High”. If you were systematically investing when the index was higher, it is prudent to continue investing when the index dips. In fact, increasing the SIP contribution in times like this would be a safer play on the volatility instead of concentrated purchases. Continue your SIP, weather the storm, stay the course and over a long period of time, you will definitely make good returns.
Lastly, as Warren Buffett says “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”