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How to React to Market Volatility

How to React to Market Volatility

The thing about investing in the stock market is that everyone is aware of the risks. Dramatic market swings are inevitable – the market fluctuates due to various external events and changes in the business cycle, increasing the risk. 

Undoubtedly, any negative affect on the portfolio can be unnerving for investors, triggering emotions and raising concerns in the market. This leads them to question what they could have done differently and take hasty investment decisions based on certain negative emotions. 

As an investor, you cannot control how the market works; you can, however, change how you react to it. Understanding market volatility, it’s causes, and a sound financial plan are the key ingredients of navigating an unpredictable market and keeping your emotions in check.

This blog will talk about market volatility and the various steps you can take to handle it efficiently.

What is market volatility?

The stock market often experiences sharp, erratic price movements that can lead to a dramatic rise and fall in prices. These unpredictable movements are what investors see as market volatility, which can last for a few days, weeks, or even months. Simply put, it determines how quickly the value of security changes and indicates the risk linked to these changing prices.

However, most of these changes are temporary, and a volatile market does not always mean losses. In fact, investors can earn good returns even in a declining market by trading certain securities.

As a result, how you react in a volatile market determines your financial well-being in the long run. 

How to react in a volatile market?

An unpredictable economy, sudden policy changes, political developments, or erratic shifts in the stock market can often lead to a volatile market. But you can always prepare for it better by taking these steps-

1. Pause and analyse

First things first, market volatility is highly unpredictable. So, it always makes sense to take a step back and put things in perspective before you make any investment decisions. Give yourself some time to research the market, analyse your financial goals, and talk to a financial advisor to get back on track.

This is because, historically, most market declines are known to be followed by a recovery. As a result, it is always a good idea to pause and analyse the market situation. 

2. Revisit your financial plan

In times of uncertainty, it is easy to lose sight of your long-term financial goals as you recover from temporary losses. But it is important to revisit your financial plan for long-term growth-

  • Re-evaluate your financial goals and the time horizon set for each. If these goals are no longer feasible owing to volatile market, you can immediately make necessary adjustments to stay on track.
  • Determine your monthly income and expenses to see if you can manage them comfortably.

3. Re-evaluate your risk appetite

To control your emotional responses to a volatile market, it is a good idea to consider your risk appetite from time-to-time. This involves assessing if you are willing to take some risk and be patient while the market recovers or if you are uncomfortable taking risks in a declining market.

Depending on your assessment, you could consider positioning your investments for moderately high risk or rebalancing your portfolio with more risk-free investments. 

4. Review portfolio diversification

If your portfolio is over-exposed to a particular sector or security, you might want to reconsider your investment mix to diversify and limit the risk. 

This means spreading your investments across equity, debt instruments, and cash. Further, you can diversify among different asset types. For instance, you might want to invest in a mix of government and corporate bonds with varying maturities to mitigate risk. Or you could include a combination of high-performing sectors for growth. 

As the market becomes volatile, reassessing your portfolio can ensure your investments align with your primary financial goals while minimising risk.

In the end

Market volatility is an expected part of investments, but a few smart decisions can make sure you stay calm and focused on your long-term financial goals.

Want to start your stock market journey but worried about the volatile market? Turn to Tata Capital wealth. Our financial experts will help create a tailored investment portfolio based on investment goals, risk appetite, and liquidity needs. We’ll be with you every step of the way to ensure you get the best out of your investments.

Stay up-to-date with the latest market insights and get the financial help you need. Visit our website today.

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