Navigating Market volatility: Tips for staying calm during turbulent times

Post-March 2020 crash, thousands of investors joined the market and made handsome gains in the second half of 2020 and 2021. However, post, the number of active investors has fallen. One of the prime reasons for it is that most investors have not been able to navigate the market volatility. Therefore, if you are new to investing or have recently started, you must learn to stay calm during turbulent times.

In this article, let us help you with time-proven tips to stay calm in tough times.

What is market volatility?

You can only avoid something when you understand it. So, first, we will make you understand market volatility in simple language.

Market volatility refers to the degree of variation or fluctuation in the price of a financial instrument, like a stock over a specific period. It is a measure of how much and how quickly the market's prices change.

Let us take the example of a hypothetical company ABC Limited to understand it. ABC Limited is listed on a stock exchange, and therefore, its price is subject to market forces, news, and economic developments. Suppose the stock price of ABC Ltd has been steadily increasing over the past few months due to strong earnings reports and favourable economic conditions. During this period of relative stability, the stock price looks like this:

Month 1: Rs 500
Month 2: Rs 520
Month 3: Rs 550
Month 4: Rs 580
Month 5: Rs 600

Low Volatility Phase: In the first five months, the stock of ABC Ltd experienced low volatility. The price fluctuations were relatively small, and the stock exhibited a smooth upward trend. You can attribute this low volatility to positive news, investor confidence, and overall market stability.

High Volatility Phase: However, during the 6th month, ABC Ltd announces its earnings report, which falls short of market expectations due to unexpected challenges faced by the company. Additionally, an industry-wide regulation change creates uncertainty about the company's prospects and sector. As a result, investors start selling their shares, triggering a rapid decline in the stock price. The stock prices for the following months look like this:

Month 6: Rs 500 (Stock price decreases due to poor earnings and uncertainty)
Month 7: Rs 450 (Continued negative sentiment and widespread selling)
Month 8: Rs 550 (Some positive news and buying interest)

During these months, the stock experiences significant price swings, reflecting high market volatility. Factors such as disappointing earnings, regulatory changes, and investor sentiment may have contributed to the fluctuations.

Causes of Market volatility

Below are some causes of market volatility:

Economic Indicators: Economic data, such as GDP growth, employment reports, inflation rates, and consumer sentiment, can significantly impact market volatility. Positive or negative surprises in these indicators can lead to sharp market movements.
Geopolitical Events: Political instability, international conflicts, trade wars, and geopolitical tensions can create uncertainty and trigger market volatility.
Earnings Reports: Company earnings reports and guidance can influence the stock prices of individual companies and, in turn, affect overall market volatility.
Interest Rates: Central bank policies and changes in interest rates can have a significant impact on financial markets. Monetary policy decisions can affect borrowing costs, investment decisions, and consumer spending, leading to market fluctuations.
Global Events: Natural disasters, pandemics (like COVID-19), and unexpected events can disrupt markets and cause rapid price movements.
Investor Sentiment: Market participants' emotions and perceptions about the economy and financial markets can lead to volatility. Fear, greed, and herd mentality can exacerbate price swings.

How to measure market volatility?

Investors can quantify market volatility through statistical metrics like:

Standard Deviation: This measures the dispersion of a set of data points from its mean (average). In the context of finance, it indicates how much the prices of a financial instrument have deviated from its average price over a specific period.

Beta: Beta measures an asset's price movement relative to the overall market. A beta of 1 implies that the stock price moves in sync with the market, while a beta greater than 1 indicates higher volatility and a beta less than 1 suggests lower volatility.

Volatility Index (VIX): The VIX, also known as the Fear Index, gauges market participants' expectations for market volatility shortly.

Tips for staying calm during turbulent times

The first tip is to understand market volatility, and we hope you understand it at some level now. You can continue to educate yourself about market volatility and its common causes. Here are some tips to help you stay calm during turbulent times:

Have a Solid Investment Plan: Develop a well-thought-out investment plan based on your financial goals, risk tolerance, and time horizon. Stick to your plan even during periods of volatility, avoiding knee-jerk reactions.

Diversify Your Portfolio: Diversification involves spreading your investments across different sector stocks and market-cap. It can reduce the impact of volatility on your overall portfolio.

Avoid Emotional Decision-Making: Fear and panic can lead to irrational decisions. Avoid making impulsive moves like selling all your investments during a downturn. Instead, rely on your investment plan and long-term strategy.

Focus on the Long Term: Equity investing is a long-term journey. Short-term fluctuations are less relevant in the grand scheme of your financial goals. Remind yourself during tough times.

Keep Cash Reserves: It's essential to have an emergency fund or cash reserves for unexpected expenses. Additional cushions can reduce stress during market downturns, as you won't be forced to sell investments at the wrong time.

Avoid Constant Monitoring: While staying informed is essential, constantly checking your investments during turbulent times can lead to anxiety and unnecessary reactions. Consider checking less frequently, like once a month or a quarter.

Conclusion

Market volatility will be part of your journey. You cannot avoid it in your financial journey, but you can definitely learn to ride it without any significant impact. Hopefully, the content will make you a better investor, and you will stay in the market irrespective of market conditions.