How long-term investors should deal with market volatility
Equity markets are subject to cycles of volatility. Market volatility is a reminder to review your investments regularly and make sure you have a well-diversified portfolio. Therefore, working with a plan can make the volatility work in your favour.
A natural reaction to the market volatility would be to reduce or eliminate any exposure to equity, but will it make sense in the long run? Long term investors like Akhil must remain calm through periods of volatility. Making dramatic changes to portfolio during such times could prove detrimental to his wealth. Akhil has invested with a certain investment horizon and an investment plan in mind.
He is aware of the inherent risks of equity and the potential long term returns. His equity investment provides him the best opportunity to meet his retirement goal in the long run. If he quits at this time out of panic, he will be hurt in three ways: One, the opportunity of investing at lower prices. Two, the possibility of missing an upside when he is not invested. Three, the possibility that his money would be deployed at lower rates of return in alternate asset classes.
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A better choice would be to hold back from investing more in equity. His equity exposure would naturally come down if he does not put in fresh money. If he invests the current surplus in debt, it will automatically rebalance his portfolio. The only downside to this is the lost opportunity of investing in a falling market.
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Equity markets are subject to cycles of volatility. Market volatility is a reminder for Akhil to review his investments regularly and make sure he has a well-diversified portfolio. It may be natural to react emotionally, but by working with a plan, he can make the volatility work in his favour.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)