How to turn stock market volatility into an investment opportunity?

Investors who select their portfolio judiciously and remain loyal to their time horizon are likely to achieve positive returns. We will see how to select the best stocks prudently.

A falling stock market in the short term is triggered by bad news or fear. Currently, most businesses have slowed down due to the uncertainty associated with the pandemic caused by COVID-19. This has resulted in global panic, which has in turn triggered a stock market crash. In India, the 21-day lockdown has been estimated to create a dent of 7 lakh crore on the economy.

However, this could be a rare opportunity for long-term investors. As Economist Paul Samuelson once observed, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

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1. The stock market view

India offers everything a promising market can. But with stock markets falling every day over the past few months, one tends to hear multiple opinions. Some say the worst is yet to come, while others say it’s the best time to make an entry. But regardless of the view, such a situation is not unprecedented. 

Stock market volatility offers entry opportunities and nobody can predict the lowest point. Investors fail to buy stocks when they are falling because they fear that the stocks will not recover. There is no right or wrong decision; the most prudent way forward is to select the right stocks.

Related: Important things to know before investing in the stock market 

2. Managing one’s investments

There are a few checks to be done in order to decide the fate of your investments. Stock selection is of cardinal importance as companies with robust fundamentals are likely to survive tough times.

• Earnings growth: Stocks with consistent and steady growth are a good bet for the future. A big fluctuation can be a red flag.
• Industry value: One should study the company’s strength in the industry and know how well-placed it is when compared to its competitors.
• Debt-equity ratio: Be wary of companies with high amounts of debt; always consider those companies that have more assets than liabilities.
• Price-to-earnings ratio: Check how well a stock’s price is in relation to its earnings. P/E ratio is one of the most important considerations for value investing. Value investors prefer to invest in stocks whose P/E ratio is less than 15 (a P/E ratio of 15 means investors are willing to pay Rs 15 for every rupee earned by the company).
• Steady dividend: A company that pays consistent dividends is a good pick. One should consider investing in stocks with best dividends.

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3. Generating returns on investments

There are some things to keep in mind while aiming to get better returns on your investments.

• Be aware of the risks involved: Stock markets can be highly volatile, especially in the short term, and they can sometimes go south soon after you invest. So  be cautious while investing in short-term funds. As for long-term funds, here too you should have the courage to ride the rollercoaster.
• Do not invest heavily in a single stock: If your research or advice goes wrong, you may end up losing a lot of capital. The best investment strategy is to invest in many different companies to reduce risk. This spreads out your investment and protects it if one company’s stock plummets.
• Have a reasonable time horizon: Once you select your stocks, you have to have faith in your decision and stay invested for a long period.

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Choosing the best stocks during a recession

Consistent Compounders have delivered positive returns even during tough times because of their stronger fundamentals and healthy earnings when compared to the broader market. In a bullish phase, most stocks tend to perform well. The true test is when the euphoria ends. That is when stocks with poor underlying fundamentals are decimated. This automatically leads to capital erosion for investors. Therefore, it is important to select your stocks prudently.

No investment is risk-free, but investing in the stock market can be an attractive investment strategy over the long term. That is if you understand where to invest and know that the tide could turn anytime. Whether you are saving for retirement or trying to achieve other goals, investing in stocks does not have to be a scary process. Just follow these simple strategies and you can make it work for you. If you are confused whether to invest in equity mutual funds or stocks, read this to clear your mind. 

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.