09 Apr 2020 by Pradeep U
How to Overcome Stock Market Volatility?

Currently, the economies across the world are facing a challenging time. The reflection of the same can be seen across the widespread correction in stock markets in India.

However, corrections or bear markets are nothing new to the stock markets in India. The reasons may vary though, with the most common reason being overstretched valuations.

The year 2008 was considered as one of the worst years for stock market investors worldwide.

That record broke this year! 

Stock markets have witnessed their worst mayhems with never before seen market corrections and indices hitting lower circuits repeatedly in March 2020 due to escalating fears of the global pandemic caused by the Coronavirus.

Amidst these series of market corrections, in between, there have been some moments of recovery too triggered by news of government announcing economic stimulus, rate cuts and vaccination trials.

Only time will tell whether the number of Coronavirus cases will escalate further or tone down.

At this point, most share market investors are facing a common dilemma. 

Is it time to do bottom fishing? Or Is it time to wait on the sidelines and watch patiently as there could be new lows?

To answer the above questions, let's take a look at the two possibilities and their possible outcomes.

Situation 1: The pandemic is under control.

Outcome: Undoubtedly, the economy and markets will recover in some time.

Situation 2: The pandemic worsens.

Outcome: Some countries may experience recession and markets will correct further. Even in the worst-case scenario of the two situations mentioned above, one should not forget that the world has been through difficult times before as well. Take for example, the burst of IT bubble in early 2000 and SARS epidemic of 2002-2004.

And who can forget the global financial crisis of 2008 fuelled by the American subprime crisis?

Coincidently two of the biggest crashes in the stock markets in India too happened around the same time.

Check out the below charts.

Chart 1

From a high of 5,933 points on 11th Feb 2000, Sensex corrected to a low of 2,667 on 26th Sep 2001 and remained subdued over the next two years. However, as seen in the above chart, stock markets in India not only recovered by Jan 2004 but also touched new highs. 

Chart 2

From a high of 20,869 points on 08th Jan 2008, Sensex corrected to a low of 8,160 on 09th March 2009. But despite the global liquidity crunch, the stock markets not only recovered by Nov 2010 but also touched new highs.           

In both the above cases, the recovery period was around 1 to 2 years.

Now coming back to the current situation, till the time the dust settles over the Coronavirus, stock markets are going to experience extreme volatility.

Here’s what you can do as a share market investor:

Stay invested in your stock market investments

The current value of your investment may have gone down significantly. But remember it is only a notional loss. Don’t make the mistake of turning it into real losses by selling it off.

Invest in the stock market in tranches

If you have some amount handy for investment, don’t invest it at one go. Invest it in systematic tranches so that you can make the best use of this current market volatility. Also, invest with a long term horizon of 3 years and above.

Invest only in excellent quality stocks in the stock market

Stock markets have corrected a lot in the last month. We can also see the prices (and not value) of many fundamentally sound businesses going down. But that does not mean the fundamentals of quality stocks have changed in any manner? Any company that is well-managed and has an established business model with consistent growth in revenues will continue to do so when the economic climate is favourable again. Read more about how you can identify fundamentally sound stocks.

Become an informed investor

Last but not least, use this time wisely to invest in knowledge. Remember, stock prices are driven by the fundamentals of the company behind the stock in the long run. So, try to understand and learn the parameters which make a stock fundamentally sound and why fundamentally sound stocks can survive any volatility and emerge triumphantly with time.

At the height of the global financial crisis of 2008, when stock markets across the globe were crashing badly, and panic-struck investors were selling stocks like there was no tomorrow, there was one stock market investor who was buying stocks. It was none other than Warren Buffett.

Buffett revealed his rationale behind investing at that point of time when all others were selling. In an article on the New York Times dated 16th Oct 2008, he quoted, “The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter, and headlines will continue to be scary. So…I’ve been buying American stocks.”

The current situation looks familiar isn’t it? Scary headlines…crashing markets.

As mentioned before, these are testing times, but we’ll pass through them. And we’ve started witnessing a recovery in stock markets in India, presenting a moment of ample opportunities for investors to create wealth. Know more about them here.

Before taking any decision, keep two facts in mind:

  1. This pandemic will pass.
  2. The markets will rebound as it has from SARS, Ebola, Swine Flu, or any other crisis.

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