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Coping with volatility

The stock market has become a scary place these days with the peaking of volatility. One day, the Sensex rises 200 points, and it falls 150 points the next. Often, there are days when the Sensex swings 300 points between its high and low levels.

Frontline stocks hit the lower circuit, the upper circuit and the lower circuit again on the same day, especially in the new economy stocks. Add the NASDAQ connection and overnight positions become rather dangerous. So what does the small investor do in such a volatile scenario?

Volatility has become a global phenomenon led by the NASDAQ. At present, volatility seems a reality and investors need to re-work their strategies around it. Investors have to be nimble in getting in and out of stocks, which makes investing a full-time activity.

Equities provide the best returns over the long term against any other investment avenue. But they can also come with the worst shocks over the short term.

Here are some ways to deal with volatility suiting your risk profile.

1) Long-term or short-term

Decide whether you are a long-term investor or a short-term investor. If you are a long-term investor, then the current market provides many opportunities. If you are a short-term investor, the market requires you to be fast. The high volatility provides a lot of entry and exit points to make money. But if you aren't quick, the losses can be stiff.

Of course, many stock prices have converted short-term investors into long-term investors as exits are painful. But you have to decide if you can sleep well even after your stock has halved or is down to a third of your cost. The day or week traders can do little other than reduce the number of their trades.

2) Know your risk-taking ability

If you are a low risk-taker, like the returns of equities but hate the wild swings, the best option for you is the mutual fund route. If you are a very low risk-taker, go for balanced funds that are well-diversified. If you can take a somewhat higher risk, you have equity funds. If you want to reduce risk in this category, go for funds that do not have a very high exposure to a particular stock or particular sectors. Most funds today have a high exposure to infotech, telecom and media. Your choice gets rather limited if you want a good fund manager and a well-diversified portfolio.

If you are a medium risk-taker, then you could look at a combination of equity and mutual funds. You could also look at some sectoral funds. Infotech funds, FMCG funds and pharma funds have become rather attractive, but only for long-term investors.

If you like to dabble in equities yourself, then this is the time to stay in the top-flight companies in the sectors of your choice. Stock prices have fallen substantially and most of the leaders are available at about half the yearly highs.

3) Keep targets and stop losses

For the long-term investor, this may sound foolish. For anybody who entered a solid technology stock at lower levels, it may seem ridiculous. But the last crash has made people aware that booking profits is healthy and it is a practical strategy in today's volatile markets. Stocks hit the buying freeze for eight days in a row, but when the tide reverses, you will not be able to exit for the next 15 days.

When you buy a stock, decide at what price you want to book profits and at what price you will set your stop loss. You may review the situation at your targets and change your opinion at that time. You may also need to follow technical analysis to fix your support and resistance levels.

4) Move with the trend, but don't chase stocks

Short-term investors could move with the trend as indicated by price and volume behaviour. But don't chase stocks. Remember, you could be the last one to enter the scrip. You will get many opportunities to buy the same stocks at lower prices, so don't jump into a stock blindly.

5) Don't go overboard on the new economy

The new economy provides high returns with high risks. But don't overextend yourself in tech stocks. Keep your equity portfolio diversified between the old economy and the new economy. And the thumb rule is not to expose your portfolio to over 50 per cent to the new economy. The old economy continues to offer value across the board at current prices. The old economy also provides the perfect hedge for the extreme volatility in tech stocks.

Of course, if you are a long-term investor, this volatility shouldn't affect you so long as you have conviction in your investments.

Stock Strategy

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