How to deal with market volatility?

Stock markets worldwide continue to stay volatile in the present times driven by the Russia-Ukraine war, spiraling oil prices, inflation, forthcoming interest rate hike, tighter liquidity positions, bleak economic growth, and many more.

It is natural that investors get worried in these challenging periods, and they start questioning their long-term investment strategies. These investors are generally those who are new to this world. They get influenced by the surrounding negative news in the market and can often be tempted to pull out of the market and wait for the period where they feel safe entering it.

In such an environment, it is essential to understand that market volatility is a situation that is certain to happen at some point in time. It’s the market nature to show some fluctuations in the short run. In such a situation, people must ignore these short fluctuations and start maintaining long-term horizons.

In this article, we will look at some of the tips that can help tackle the times when the market is volatile. But before that, we will look at some common emotions seen in investors during this period that result in their actions.            

Some Common Investors’ behavior during volatility

Amid uncertainty in the market, there are three very common investor sentiments seen amongst investors. These include:

1. Reactionary:

In this stage, the investor might feel that they need instant action at the initial sign of market uncertainty. It could be buying or selling the underlying asset without thorough research. It could be possible that the time period, investment style, or investor’s patience level is short. It is common that many investors get stuck in this phase, and they become anxious and take immediate action.

2. Liquidity:

In this stage, some investment firms liquidate their position in case the prices move against their existing price movement. In such an environment, where the volatile market can trip margin and risk limits, selling can result in further selling.

3. Fundamental:

In this stage, the investor does not buy or sell unless there is an extreme price swing. These investors sacrifice speed for analysis, and they decide based on the long-term consequence of a given event.

Strategies to follow during uncertain times

During market certainty, when people are surrounded by negative news, it is obvious that people get worried. But panic is not an ideal solution. Instead, we can follow some strategies during these challenging periods.

1. Do not abandon the plan: Many people in the early stage of their career panic the most during these times. In such a situation, instead of dropping the plan, it is always good to consult a financial expert who will guide you in planning your goal and strategy so that you remain on the correct path.

2. Stay Invested: Experts suggest that during uncertain times, it is essential that we do not let our emotions drive investment decisions. Instead of looking at short-term losses, one should focus on long-term outcomes.

3. Diversification: This is another way to reduce the risk. When the market is highly volatile, there is an excellent opportunity for investors to reassess and rebalance the portfolio.

4 Risk Management: When the market is volatile, it is always good to take an active approach to risk management.

How can investors take advantage of market volatility?

1. When the market is volatile, people indeed get worried, but at the same time, there is a massive opportunity for investors aiming to make money in the irregular market environment. They can make short-term profits from swing trading.

2. Day traders focus on volatility that happens each second or minute. On the other hand, swing traders aim at longer time frames, usually days or weeks.

3. Many traders trade on VIX or option contracts to capitalise on a volatile market.

4. Many traders use several indicators to gain profit during these challenging periods.

Also Read: Investor or Trader- Who are you?

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