Sharp market swings can feel alarming, but volatility is a permanent feature of investing, not a malfunction. A sudden fall in the INDEXDJX DJI can grab headlines and unsettle sentiment far beyond its home market. Equally, an abrupt drop in the KOSPI can trigger concern about Asian growth. Indian retail investors, whose participation has surged in recent years, benefit from learning how to interpret such turbulence calmly and respond with a plan rather than panic.
Understanding What Volatility Is
Volatility measures the degree of variation in the price of an asset over time. Volatility is not the same as risk, though it is frequently confused with it. Risk implies the potential for permanent loss, while volatility is the potential for temporary fluctuation in either direction.
India’s home-grown volatility index, the India VIX, reflects the expected near-term volatility of the Nifty. Rising values indicate growing uncertainty and declining confidence; low values imply complacency. Neither is a reliable predictor of future performance, however.
Why Retail Investors Lose Money
There are several market-related reasons, but most retail investors fall victim to behavioural traps. For example, investors are loss-averse; losing Rs 10,000 feels twice as bad as gaining Rs 10,000. This may tempt investors to take profits early, or hold on to losing positions too long. Also, investors often engage in herding – doing what others are doing – and tend to buy assets that have appreciated and sell those that have depreciated. This is exacerbated by social media, reinforcing the sense that everyone else is making money. Many retail investors tend to “buy high and sell low”, the exact opposite of what successful investing requires.
How To Protect Yourself
There are various techniques, ranging from systematic investing to diversification to always keeping some cash on hand. Systematic investing smooths price fluctuations, so that you buy more shares at lower prices and fewer shares at higher prices. Diversification protects you against the risk of any single stock or sector plummeting. Having cash on hand ensures that you do not have to sell a winning position to cover a losing position.
Do not use leverage, especially if you are relatively inexperienced
Borrowing to invest can amplify losses as much as it can amplify gains. Also, you should consider avoiding derivatives, where many individual investors in India have consistently lost money (regulatory reports show that a huge majority of individual futures and options traders in India lose money).
The Power Of Self-Help
It helps to write down your specific goals and time frames and acceptable drawdowns; have this with you when you are feeling panicky about the markets. It also helps to not to check your portfolio too frequently; in fact, most experts advise to only check it once a week, at the most. You might also want to analyse your losses – in a down market, certain stocks or sectors will fall more than others. This is a good time to review your holdings and determine if any position has fundamentally deteriorated. If so, consider selling it to realise a loss. Meanwhile, some stocks may have simply fallen on the market, while fundamentals remain intact.
You might want to consider hiring an investment adviser, especially if you feel that you need help. Advisers are required to register with SEBI; look for one who operates on a fee-only basis, so that he does not have a conflict of interest arising from commissions on products that he sells to you. Most importantly, remember that volatility is normal and that it will happen again; the question is whether you will be prepared when it does. Investors who learn to diversify, and to think long-term, often find that it is precisely during periods of stress that the best opportunities arise.
