Keep enough buffer to deal with market volatilities

In the last few months, there has been a continuous flow of negative news about the domestic economy sputtered with some governmental peppering while the global macros remain sluggish.

The geo-political equations are changing due to the ramification of changed US foreign policy and the middle Eastern crisis turning worse by the day.

These uncertainties are adding fuel to the already ignited fires star­ted by the overall global economic slowdown and the Brexit concerns.

The central banks across the world have begun to proactively cut down the interest rates in a bid to revive growth but are increasingly realising that the role of monetary policy is limited.

Even as overall corporate and public debt is shooting up, central banks are sitting on huge assets, displaying inability to discard or divest them.

In the wake of this, there is a continuous chorus about another impending global recession within a decade of 2009 Great Financial Crisis.

These aspects have amply reflected in the stock market volatility both domestic and overseas, triggering huge volatility as a reactionary measure to any negative news.

Domestically too, investors are unable to assess whether the corporate defaults have hit the bottom or are there further surprises in the offing.

The bank bad debt is ballooning while a recovery mechanism envisaged through the IBC (Insolvency and Bankruptcy Code) is facing legal tangles.

The persistent non-performing assets (NPA), reduced consumption, slackened credit offtake, decreased business and consumer sentiment are posing fresh risks to the stock markets and indecision to an investor on assessing how to go forward.

One has to always remember that these situations turn out to be an ebb in the overall frame of investing and sometimes even wouldn't form a blip in the entire investing experience.

Of course, one mistake could not only just wipe out a larger corpus but would create a huge upheaval to recover again. These are the extremes, though, one has to be aware of these situations.

No one could, however, built-in these kinds of scenarios of black swan events while constructing their portfolios. So, what has to be the way forward and how to approach these situations.

The only way out is to create a portfolio which other than reflecting your goals, timelines and risk appetite should also have the buffer to absorb some of these risks.

The portfolio hence should have less correlated or non-correlated asset classes so that the overall returns don't hinder much while also mitigating the overall risk.

Also, these situations offer opportunity to participate in good businesses at cheaper valuations. When the market in general exhibits negativity, it leads to secular downgrade of the stocks across the board, making available good stocks at a bargain.

One has to always remember that investing is more of a journey and it requires one to survive to fight it out the next day. So, remaining alive is critical than winning battles as the time spent in the market is essential to making wealth in equity markets.

It's also important to stay liquid during the crisis to gain from these opportunities and have exposure to these quality stocks. History suggests that these are the stocks which bounce back first as the concerns of the crisis recedes or when a recovery takes into effect.

The other important factor that decides who wins or loses is not just the construct of the portfolio but the investor who acts in these situations.

While the falling market not only presents opportunities but also creates lots of fear among the investors and it becomes very difficult to take decisions.

For instance, a particular stock would correct by a large per cent and knowing pretty well that it's of a great business, the continued fall and not knowing the bottom or trying to bottom fish becomes a hazard.

One needs to keep in mind that it's difficult if not impossible to time the market and so buy only at the bottom. A study puts that since the inception of Nifty in 1990, there were 19 instances where the drawdown was by a minimum of 10 per cent and at only three instances does this materialise to a 50 per cent fall.

And in nine of the 19 instances, the index added an additional 10 per cent drawdown i.e. a total of 20 per cent fall. So, whenever there is a correction of such quantum, it's very difficult to take decisions of taking fresh exposures especially not knowing what's in store in the next moment.

To sum-up, the way to approach a difficult period in market is to have a plan of what to be done during these corrections while having a portfolio that has the liquidity to gain from the presented opportunities and most importantly a will or mental condition to not just spot these prospects but to act on them.

(The author is a co-founder of 'Wealocity', a wealth management firm, and could be reached at [email protected])