The stock market is like a rollercoaster ride—sometimes it’s a smooth rise, other times, it’s a wild drop. Falling or volatile markets are not at all gloomy for long-term investors, if they know how to ride it well. In fact, market volatility presents opportunities for investors to capitalise on, all they have to do is just manage their behaviour and emotions. The key is understanding how to act when the market takes a dive and rise in future to reach newer heights. Your financial journey will largely depend upon your behaviour during the times of volatility.
In this article, we’ll explore five actionable steps that investors can take to make the most out of a falling or volatile market.
1. Stay Calm and Stick to Your Plan
One of the worst things an investor can do during a market downturn is panic, but unfortunately it is still the most common reaction from investors. Emotional reactions often lead to rash decisions like selling stocks in a hurry, which may lock in losses. A disciplined, long-term approach is essential during periods of market volatility.
Panic fixes our sight and thoughts on less important factors and we start believing them as the most important ones for investing success. We develop near sightedness and start slipping into depressing thought mechanism.
Warren Buffett said, “Be fearful when others are greedy & greedy when others are fearful”. Investors know it, but when panic creeps in, these sayings sound meaningless.
Investors must never forget the value of Trust-Patience-Discipline in their approach to portfolio management.
Trust the decision which you had made in the past by starting to invest in equities. Equity investing is a stepping stone towards successful investing journey & achieving your long-term financial goals. We must trust the historical behaviour of equities, as we must never forget that history repeats itself. One of the easiest way to develop trust is by asking the right questions to yourself & your advisor.
Patience is utmost important as it acts as a bridge between Trust & Discipline. If you trust something, but are unable to keep patience then you will lose out on discipline which is required to accomplish any task successfully. Patience can be kept by setting your expectations right from the stock markets. Suppose, last 1 year return from the markets is 40% and investors think that this will continue forever is over expecting from the markets. These high expectations will bound to hurt your emotions when markets fall. Markets only give average returns from the periods of highs & lows and in no way we may outsmart the markets consistently.
Discipline can never be achieved without patience. The road to success is a long bumpy ride, there will be ups and downs. Only those who keep patience taste the success. We must keep the promise which we had made to ourselves when we started equity investing. I know you remember them; Investing for the long-term, keep on regularly investing till your goal is not achieved, investing even when markets are falling as things are getting cheaper etc.
During the global financial crisis of 2008, the Sensex plunged by almost 60% from its peak of 21,000 to below 9,000 points. Many investors rushed to sell, fearing further declines. But the worst happened with investors who knew they should invest when the markets fall, but still could not invest when the markets fell. Wondering why? because they stopped their SIPs & sold their portfolio to buy again when the markets will become more cheaper. But to their surprise they were just spectators when the markets bounced steeply with upper circuit in the index, the first time ever. How can someone who was waiting to invest at the level of 9000 will be able to invest at 10000, 11000 or higher levels.?
However, those who held their ground and continued to focus on long-term growth saw their investments recover significantly in the years that followed. By 2010, the Sensex had crossed the 21,000 mark once again, and by 2014, it had surpassed 28,000 points, reflecting a 200% recovery from the lows of 2008-2009.
Action: Revisit your investment goals and risk tolerance to ensure you’re sticking to a long-term strategy. If your portfolio is aligned with your financial goals, stay calm, and avoid making impulsive decisions that could lock in losses or diminish portfolio performance.
2. Don’t Start Micro-Managing Your Mutual Fund Portfolio
During periods of market volatility, it’s easy to get caught up in the temptation of overly & closely managing your mutual fund portfolio. We start chasing those strategies & tactics which are beyond our control, in fact anyone’s control. We shift our focus from what’s achievable to something which is not achievable. This behaviour gives us a false hope to achieve what we desperately want.
Many investors panic and start shifting allocations constantly, thinking that their funds need frequent tweaking to perform well. They start thinking that changing the funds can enhance their portfolio performance, though mostly this strategy doesn’t work in the long-term.
Researches tell us that more than 90% of portfolio performance is based on our portfolio asset allocation and behaviour management and not on the product or security selection. If someone had invested 20 years ago in a fund or stock that delivered the best performance over the last 20 years, even they might not have made the desired returns. Why? Because they would have likely sold it long ago during a downturn in the fund, stock, or market.
None of the high yielding assets give volatility free returns, but investors see investing success as a linear progression, which it is not. Investors mostly don’t make money even from the best of the products, as they are not able to manage their emotions & behaviour.
In the process of evolving as a better version of ourselves as an investor, we have to start looking inwards rather than outwards. Investors have to focus on managing their own behaviour & emotions instead of managing things which they don’t control or are not controllable. Markets present countless reasons to make impulsive, emotional decisions, ones that may feel comforting and seem smart in the short term but often prove detrimental in the long run. Yet again, an opportunity to build a rewarding investment journey slips away due to emotions, leaving only dismay and excuses.
Chart shows the percentage impact of various factors on portfolio performance:
Investors give too much weightage to selecting funds or timing the markets, but the real opportunity lies in managing the asset allocation. You can’t control the performance of markets or funds consistently and neither can the fund manager.
Investors keep searching for a fund which may always give the highest returns & does not fall in the times of volatility. Even the fund managers want to do that, but it is not possible. Trying to do that is like over-weighing our intelligence & experience over the fund manager’s.
Focus on aspects that are controllable and the foremost is managing your asset allocation & behaviour.
In 2011, the Indian stock market saw significant volatility, with the Sensex falling 25% during the year. Many investors, in an attempt to “protect” their portfolio, moved out of equity funds and shifted to debt or fixed deposits, believing equities would not recover. However, investors who didn’t deviated from their asset allocation saw strong growth in the subsequent years, far outperforming the safe, conservative options.
Action: Resist the temptation to micro-manage your investment portfolio. Don’t watch individual fund performance too closely, as what seems loser today might be the winner of tomorrow. Review your mutual fund portfolio annually, but avoid making rash decisions during times of volatility. Let your funds perform as intended, based on your long-term financial goals.
3. Increase Your SIP Contributions
When markets fall, the power of Systematic Investment Plans (SIPs) kicks in. SIPs allow investors to invest a fixed amount regularly, buying more units when prices are low and fewer units when prices are high. In a volatile market, you get to buy quality stocks at a lower cost on average, which can significantly benefit your portfolio in the long run.
Here is a comparative table illustrating the performance of a Lump Sum Investment vs SIP Investment during volatile markets.
Scenario Assumption:
Investment Period: Jan,2008-Dec,2010 – 36 months
Market Condition: Volatile market-Sensex fluctuates between 21000 upto 21000
Investment Product: Sensex.
Total Investment: ₹10,00,000
Lump Sum: Invested entirely at the beginning.
SIP: ₹27,777 per month (Total: ₹27,777 * 36 = ₹10,00,000 (approx))
- Values are approximate for ease of calculation
Lumsum Investment in Sensex:
| Month | Lump Sum Investment | Sensex Level | Total Units | Current Value | Lumsum Portfolio Volatility |
|---|---|---|---|---|---|
| Jan, 2008 | ₹10,00,000.00 | 21000 | 47.62 | ₹10,00,000 | NA |
| Mar, 2009 | NA | 8400 | 47.62 | ₹4,00,008 | -60% |
| Dec, 2010 | NA | 21000 | 47.62 | ₹10,00,000.00 | 0% |
Key Insights from the table:
Total units were constant as all the money was invested at one go at Sensex level 21000
Peak fall is nearly -60%
Portfolio delivered Nil returns during the period (Jan 2008 – Dec 2010)
The Portfolio took nearly 3 years to recover and reach break even.
Systematic Investment Plan (SIP) Investment:
| Date | Sensex Level | Amount | Units Purchased | Total Units | Total Investment | Current Value | SIP Portfolio Volatility |
|---|---|---|---|---|---|---|---|
| Jan 1, 2008 | 21,000 | -27777 | 1.32 | 1.32 | 27777 | 27,777 | 0.00% |
| Feb 1, 2008 | 17,579 | -27777 | 1.58 | 2.90 | 55554 | 51,029 | -8.15% |
| Mar 1, 2008 | 15,644 | -27777 | 1.78 | 4.68 | 83331 | 73,191 | -12.17% |
| Apr 1, 2008 | 17,287 | -27777 | 1.61 | 6.29 | 111108 | 1,08,654 | -2.21% |
| May 1, 2008 | 16,416 | -27777 | 1.69 | 7.98 | 138885 | 1,30,952 | -5.71% |
| Jun 1, 2008 | 13,462 | -27777 | 2.06 | 10.04 | 166662 | 1,35,164 | -18.90% |
| Jul 1, 2008 | 14,356 | -27777 | 1.93 | 11.98 | 194439 | 1,71,919 | -11.58% |
| Aug 1, 2008 | 14,565 | -27777 | 1.91 | 13.88 | 222216 | 2,02,196 | -9.01% |
| Sep 1, 2008 | 12,860 | -27777 | 2.16 | 16.04 | 249993 | 2,06,315 | -17.47% |
| Oct 1, 2008 | 9,788 | -27777 | 2.84 | 18.88 | 277770 | 1,84,804 | -33.47% |
| Nov 1, 2008 | 9,093 | -27777 | 3.05 | 21.94 | 305547 | 1,99,452 | -34.72% |
| Dec 1, 2008 | 9,647 | -27777 | 2.88 | 24.81 | 333324 | 2,39,394 | -28.18% |
| Jan 1, 2009 | 9,424 | -27777 | 2.95 | 27.76 | 361101 | 2,61,636 | -27.54% |
| Feb 1, 2009 | 8,892 | -27777 | 3.12 | 30.89 | 388878 | 2,74,626 | -29.38% |
| Mar 1, 2009 | 9,709 | -27777 | 2.86 | 33.75 | 416655 | 3,27,633 | -21.37% |
| Apr 1, 2009 | 11,403 | -27777 | 2.44 | 36.18 | 444432 | 4,12,603 | -7.16% |
| May 1, 2009 | 14,625 | -27777 | 1.90 | 38.08 | 472209 | 5,56,962 | 17.95% |
| Jun 1, 2009 | 14,494 | -27777 | 1.92 | 40.00 | 499986 | 5,79,734 | 15.95% |
| Jul 1, 2009 | 15,670 | -27777 | 1.77 | 41.77 | 527763 | 6,54,569 | 24.03% |
| Aug 1, 2009 | 15,667 | -27777 | 1.77 | 43.54 | 555540 | 6,82,192 | 22.80% |
| Sep 1, 2009 | 17,127 | -27777 | 1.62 | 45.17 | 583317 | 7,73,553 | 32.61% |
| Oct 1, 2009 | 15,896 | -27777 | 1.75 | 46.91 | 611094 | 7,45,750 | 22.04% |
| Nov 1, 2009 | 16,926 | -27777 | 1.64 | 48.55 | 638871 | 8,21,845 | 28.64% |
| Dec 1, 2009 | 17,465 | -27777 | 1.59 | 50.15 | 666648 | 8,75,773 | 31.37% |
| Jan 1, 2010 | 16,358 | -27777 | 1.70 | 51.84 | 694425 | 8,48,047 | 22.12% |
| Feb 1, 2010 | 16,430 | -27777 | 1.69 | 53.53 | 722202 | 8,79,536 | 21.79% |
| Mar 1, 2010 | 17,528 | -27777 | 1.58 | 55.12 | 749979 | 9,66,104 | 28.82% |
| Apr 1, 2010 | 17,559 | -27777 | 1.58 | 56.70 | 777756 | 9,95,587 | 28.01% |
| May 1, 2010 | 16,945 | -27777 | 1.64 | 58.34 | 805533 | 9,88,545 | 22.72% |
| Jun 1, 2010 | 17,701 | -27777 | 1.57 | 59.91 | 833310 | 10,60,443 | 27.26% |
| Jul 1, 2010 | 17,868 | -27777 | 1.55 | 61.46 | 861087 | 10,98,248 | 27.54% |
| Aug 1, 2010 | 17,971 | -27777 | 1.55 | 63.01 | 888864 | 11,32,345 | 27.39% |
| Sep 1, 2010 | 20,069 | -27777 | 1.38 | 64.39 | 916641 | 12,92,315 | 40.98% |
| Oct 1, 2010 | 20,032 | -27777 | 1.39 | 65.78 | 944418 | 13,17,724 | 39.53% |
| Nov 1, 2010 | 19,521 | -27777 | 1.42 | 67.20 | 972195 | 13,11,882 | 34.94% |
| Dec 1, 2010 | 21,000 | -27777 | 1.32 | 68.53 | 1000000 | 14,39,035 | 43.90% |
| Dec 1, 2010 | 21,000 | 14,39,035 | 68.53 | ||||
| XIRR | 26.53% | ||||||
Key Insights from the table:
Peak fall is -34.72% against Sensex peak fall of nearly -60%
XIRR returns of 26.53% against Sensex returns of 0% for the said period
Purchased 68.53 units through SIP against 47.62 purchased through lumsum investment
SIP Portfolio bounced back sharply in positive zone in just 15 months, while Sensex recovered in nearly 36 months.
Final Comparison
| Criteria | Lump Sum Investment- Non-Rebalanced | SIP Investment |
|---|---|---|
| Total Investment (₹) | ₹ 10,00,000 | ₹ 10,00,000 |
| Total Units Purchased | 68.53 | 47.62 |
| Final Portfolio Value (₹) | ₹ 10,00,000 | ₹ 14,39,035 |
| Profit/Loss (₹) | ₹ 0 | ₹ 4,39,035 |
| XIRR Return % | 0% | 26.53% |
Key Takeaways from the illustration:
Rupee Cost Averaging: The SIP strategy allowed the investor to purchase more units when the Sensex was low and fewer units when the markets were high, effectively lowering the average cost per unit.
Better Returns: SIP provided a better return of 26.53% compared to lump sum investing returns of 0% due to market volatility.
Reduced Risk: SIP mitigated the impact of market volatility by spreading out investments, unlike the lump sum which faced full exposure from the beginning. The peak fall during volatility in SIP portfolio was -34.72%, while in lumsum portfolio it was -57.67%
This illustration highlights how SIPs are a strategic way to navigate volatile markets and can often outperform lump-sum investments during market downturns. The lesser portfolio volatility also helps investors to hold on to their portfolio and remain invested for long-term. Need not to say; you may only generate wealth through the power of compounding in the long-term.
Action: Invest regularly through SIPs and with lumsum purchases (it helps you to average out buying price of the units in your portfolio) in the times of volatility. This practice will double the power & advantage of SIP during downfalls. This allows you to capitalise on the lower prices and get more value for your money. Even small additional purchases during downturns can compound over the long term.
4. Rebalance Your Portfolio
A volatile market offers a perfect time to review and rebalance your portfolio.
Asset allocation is defining a percentage allocation to different asset classes like equity, bond, gold etc. in your portfolio. The allocation must be based on your risk appetite, financial goals, time horizon etc.
Rebalancing involves adjusting your portfolio to maintain your desired level of asset allocation. For example, if stocks have taken a beating and your equity allocation has dropped significantly, this could be a good time to buy more stocks and bring your portfolio back to its intended allocation.
In 2020, when the COVID-19 pandemic caused the Sensex to crash by nearly 40%, many investors found their portfolios overly exposed to equities, in the absence of asset allocation. However, those who kept bonds or liquid funds in their portfolio were better positioned for the recovery. They could switch some amount in equity during the downtrend to gain and reduce volatility in their portfolios. As the market rebounded in the second half of 2020, the Sensex surged by 85% from its lows in a very short span of time. Investors who had rebalanced and added to equities during the fall were rewarded with strong returns as the market recovered.
Scenario Assumption for Rebalanced Portfolio:
Investment Period: Jan, 2008 – Dec, 2010 – 36 months
Market Condition: Volatile market-Sensex fluctuates between 21000 up to 21000
Total Lumsum Investment: ₹10,00,000
Equity Returns: Actual as per Sensex performance
Debt Returns: 7%
Desired Asset Allocation: Equity-80% & Debt-20%
Investment Product: Sensex.
Values are approximate for ease of calculation
| Date | Sensex Level | Sensex/Non-rebalanced Portfolio Rise/Fall |
Equity Value (₹) | Debt Value (₹) | Total Rebalanced Portfolio Value (₹) |
Equity % | Debt % | Rebalanced Portfolio Rise/Fall |
Action Taken |
|---|---|---|---|---|---|---|---|---|---|
| Jan 2008 | 21,000 | 0% | 8,00,000 | 2,00,000 | 10,00,000 | 80% | 20% | Desired Asset Allocation – Equity:80% Debt:20% | |
| Mar 2008 | 15,000 | -29% | 5,68,000 | 2,03,500 | 7,71,500 | 74% | 26% | -23% | Rebalancing Required |
| Post Mar-2008 Rebalance | 6,17,000 | 1,54,500 | 7,71,500 | 80% | 20% | Rebalance: Shift ₹49,000 from Debt to Equity | |||
| Oct 2008 | 10,500 | -50% | 4,31,900 | 1,60,680 | 5,92,580 | 73% | 27% | -41% | Rebalancing Required |
| Post Oct-2008 Rebalance | 4,73,900 | 1,18,680 | 5,92,580 | 80% | 20% |
Rebalance: Shift ₹42000 from Debt to Equity | |||
| Mar 2009 | 8,400 | -60% | 3,79,120 | 1,22,834 | 5,01,954 | 76% | 24% | -50% | Rebalancing Required |
| Post Mar-2009 Rebalance | 4,01,520 | 1,00,434 | 5,01,954 | 80% | 20% | Rebalance: Shift ₹22,400 from Debt to Equity | |||
| Dec 2009 | 17,000 | -19% | 8,11,070 | 1,05,707 | 9,16,777 | 88% | 12% | -8% | Rebalancing Required |
| Post Dec-2009 Rebalance | 7,33,470 | 1,83,307 | 9,16,777 | 80% | 20% | Rebalance: Shift ₹77,600 from Equity to Debt | |||
| Dec 2010 | 21,000 | 0% | 9,09,503 | 1,96,138 | 11,05,641 | 82% | 18% | 11% | Final portfolio value in rebalanced portfolio is 11 lakh with 11% rise |
Key Insights from the table:
Rebalancing is done whenever the desired allocation (Equity:80% – Debt:20%) is significantly imbalanced due to market performance.
Rebalanced lumsum portfolio has a lesser volatility of -50% compared to nearly -60% in a portfolio where asset allocation is not rebalanced.
Rebalanced portfolio gave 11% absolute returns with a lower volatility compared to index giving 0% returns with higher volatility during 2008-2010.
Action: Take the opportunity to assess whether your portfolio is properly diversified. If one asset class, like stocks, has dropped significantly, consider buying more of that asset while trimming positions in other areas that have outperformed, based on your asset allocation.
5. Focus on Long-Term Growth
In volatile markets, it’s important to remember that markets tend to recover over time. While the short-term fluctuations can feel intense, the long-term growth potential is often where the real opportunity lies. This perspective is crucial for those with a long-term investment horizon, as they are more likely to weather the ups and downs of the market.
Investors need to understand that falling or volatile markets provides an opportunity to buy the units and stocks at the lower price. They should think along the same lines as they do when buying any other goods from the market. Just keep the things simpler.
Consider the performance of the Sensex from 2000 to 2024. Despite experiencing multiple market crashes, such as the dot-com bubble burst in 2000, the global financial crisis in 2008, and the pandemic-driven crash in 2020, the Sensex has shown a consistent long-term upward trend. Though there were short-term steep falls up to -60%. From 2000 to 2024, the Sensex delivered an average annual return of nearly 12%, showing the value of staying invested for the long haul. Investors who held on through all the turbulence have seen their wealth grow substantially, as the market has recovered and reached new heights.
Action: Stay focused on your long-term investment goals and avoid getting distracted by short-term market movements. The market is volatile, but it has historically shown a positive upward trajectory over extended periods, which benefits disciplined investors.
What's the way forward?
Investors should consider having a combined strategy of following asset allocation by rebalancing their existing portfolios and keep on investing regularly through SIPs and regular additional purchases. In stock markets there are strategies to manage your risk, but there are no winning strategies to get high returns for sure. The stock markets are dependent on so many dynamic variables that it is impossible to win every time. Even the smartest of investors could not win every time in their investing journey. We have to accept the reality and only then we will have an awesome financial journey along with peace of mind.
Below table compares the portfolio performance of:
Sensex (non-rebalanced Portfolio)
Sensex (Rebalanced Portfolio)
Combined Portfolio (Rebalanced Portfolio in Sensex+ SIP in Sensex)
| Date | Sensex Level | Total Investment (Lumsum+SIP) | Total Portfolio (Lumsum+SIP) | Sensex Volatility | Rebalanced Lumsum Portfolio Volatility | Combined Volatility (Rebalanced Portfolio+SIP) | Remarks |
|---|---|---|---|---|---|---|---|
| Jan’08 | 21,000 | 1027777 | 1027777 | ||||
| Mar’08 | 15,000 | 1083331 | 844691 | -29% | -23% | -22% | Portfolio volatility has further reduced in a combined portfolio (Lumsum-Rebalanced + SIP) |
| Oct’08 | 10,500 | 1277770 | 777384 | -50% | -41% | -39% | |
| Mar’09 | 8,400 | 1416655 | -60% | -50% | -41% | ||
| Dec’09 | 17,000 | 1666648 | 1792550 | -19% | -8% | 8% | Early bounce back in a combined portfolio |
| Dec’10 | 21,000 | 2000028 | 2544676 | 0% | 11% | 27% | Better returns during the volatile period |
Key insights from the table:
Lumsum rebalanced portfolio managed risk better compared to a non rebalanced portfolio. In March 2009 when the Sensex was nearly giving returns of -60%, at that time a rebalanced portfolio in same sensex gave -50% returns. It shows that rebalancing reduced portfolio volatility by 10%.
When rebalanced lumsum portfolio is combined with SIP, the volatility in the portfolio further reduces significantly & also the portfolio performs better when the markets bounce back.
Rebalanced portfolio gave 11% absolute returns with a lower volatility compared to sensex giving 0% returns with higher volatility. But a rebalanced portfolio along with a regular SIP would have generated 27% returns with a significantly reduced volatility.
Conclusion: Volatility Is Opportunity
Market downturns and volatility are often seen as threats, but for a patient and disciplined investor, they present opportunities to grow wealth. Volatility is an inherent aspect of the stock markets, which is beyond our control. We must use that volatility to our advantage. Stick to your plan by resisting the urge to micro-manage your portfolio. By increasing your SIPs, rebalancing your asset allocation and focusing on long-term growth, you can make the most of out of these challenging times.
Remember, investing is a long-term game, and as the stock market has shown time and again, volatility often precedes growth. Keep your focus on the horizon, and stay invested with a strategy that works for you.
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