- Date : 03/08/2022
- Read: 3 mins
Investing in volatile stock markets.
The stock market has been volatile this year. The markets are worried about historically high inflation, which has beaten the records of the last 40-50 years for various developed markets. In these volatile times, the Russia-Ukraine war has added to further uncertainty in the equity markets. The stock market returns have been volatile, and the smallcap and midcap stocks have been more affected by the volatility. After two good years of stock market returns, this volatility looks like a blip in the grand scheme of things.
But, nonetheless, investors are getting jittery about whether to exit the markets or to hold their investments. Some bold investors want to invest even more money in the equity markets. Here we try and consolidate the steps you should take to figure out what to do in these testing times.
Volatile markets- What to do?
One thing you should keep in mind is that market volatility has never lasted for very long periods of time historically. This does not guarantee the future, but history is a good indicator of future performance. Whenever the markets have gone down, in the next few years, the markets have come back stronger.
This means that volatility is a temporary factor which depends on short-term factors. In the long term, stock markets have given better returns than other asset classes. In the last ten years, the Nifty50 index has given 228% returns. This corresponds to a CAGR return of 12.6%. This return is more than other asset classes. Therefore, if you can zoom out, the markets tend to outperform the other asset classes.
Does this mean you should invest more in equity?
We believe that you should stick to your investment thesis. You should be unaffected by short-term volatility and stick to what you think is right. If you have some bad stocks and you are not sure about those stocks, you should exit those stocks immediately. You should be invested in stocks that you understand and are confident about.
If you feel that tracking the stocks is too tiring, you should select the best-performing mutual funds. These funds are managed by experts, and if you select the correct funds, the fund manager will ensure that you beat the markets in the long run.
Should I add more investments?
It depends on your risk profile and the excess cash you have. If you have excess cash and you want to increase your equity exposure, you should go ahead. Historically investing in volatile times has given good returns in the subsequent years, and this might be a good time to increase your equity exposure. This is valid only if you can afford to invest more and are comfortable with short-term volatility in the next few months or even years.
Stock markets are volatile, and you should understand the risk factors in the markets. You should try to get the maximum risk-adjusted returns. If you do not understand the markets, you should consider mutual funds. Volatile times are a good time to increase your equity exposure, and the returns in subsequent years should be good if history is an indicator.
Disclaimer: This article is intended for general information purposes only and should not be construed as investment or legal advice. You should separately obtain independent advice when making decisions in these areas.