Investing In Equity Markets Is Simple, But Not Easy

After a remarkably stable 2017, there has been a sharp rise in volatility in the equity market since the beginning of 2018. There has been a sharp correction all across particularly in the broader market. As usual, in hindsight we all know the explanatory factors for such a broad based decline. Rising oil prices, sharp jump in global and domestic interest rates, a strong US dollar, few regulatory changes pertaining to domestic equities, incidents of corporate misgovernance domestic liquidity concerns, etc. The reasons are aplenty. 

The fall of 2018 has particularly come as a jolt because it’s been preceded by a rather serene 2017. Last year was great for the market not only because the broader market enjoyed a very strong rally, but also because there was hardly any meaningful correction during the year. In fact, not even a 5 per cent correction in the Sensex. A rare feat. In 2018, we are seeing some payback of that exceptional calmness. 

Fluctuations are a normal part of investing. The best way to deal with volatility is to stay the course and ignore short-term gyrations. However, that’s not easy to practice by everyone. In reality, higher volatility leads to anxiety and that often leads to wrong investment decisions. 

More practical way to deal with volatility is to mitigate the stress through proper asset allocation. Harry Markowitz called diversification “the only free lunch in finance.” Advisors have been doing a great job in terms of helping the individuals in terms of rightful asset allocation, where there is a proper mix within asset classes like bonds and equities. Within equities too, a right balance is desired where based on the risk tolerance, investors should choose between large, mid and small cap stocks.

At a more fundamental basis, there has been lots of adjustments that has happened in the form of weaker rupee and higher interest rates. Above all, there are definite signs of broader earnings recovery taking place. Asset returns are cyclical in nature. That’s the ultimate truth. The stock market will recover and move higher. It always does. However, the period of uncertainties will prevail. We have upcoming general elections and then there are global events like the US-China trade war, Italian crisis, oil politics, etc which would keep the volatility alive in the foreseeable future. 

While asset allocation should always command great importance, in an uncertain environment like this the virtues of asset allocation/ diversification come to the fore. So staying focussed towards longterm objectives and adhering to best suited long-term asset allocation strategy will continue to yield great results.