Market Volatility: How to Stay Calm During Market Swings
Kamanksha Swami
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Market Volatility Explaine
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Overview
In October 2024, the Indian market took a big hit when Foreign Institutional Investors (FIIs) pulled out ₹55,842 crores. This caused Nifty to drop by 4.4% and Sensex by 4.6% in just a week. This sudden drop shook up the market and made many investors, even the confident ones, feel anxious, showing an exemplary case of market swings due to market volatility.
When the market swings like this, it can feel like being on a rollercoaster—exciting for some but scary for others. Market volatility simply means that stock prices go up and down, causing market swings that almost every investor experiences. While high volatility can seem like a red flag, it’s actually a normal part of long-term investing—and it might even be one of the secrets to successful investing.
Instead of panicking when things get rough, it’s important to stay calm and wait for the storm to pass. In this blog, we would discuss market volatility and ways to stay calm during market swings. Let’s jump right in.
What is Market Volatility?
Market volatility refers to the degree of price movement in a financial market over a specific period. In simple terms, it measures how much prices go up and down over a period.
Often called the heart of the finance world, it helps traders interpret how quickly stock prices move up or down. A lot of people think volatility only happens when the market is going down (bearish), but that’s not true.
It’s all about how much and how quickly prices are moving.
If the market’s volatility is high, it means there are a lot of active traders (buyers and sellers), which can make entering the market riskier because prices are constantly shifting.
On the other hand, when volatility is low that means traders are confident and want to go smooth. In such times, the prices don’t change much and tend to move more steadily.
Fear and Greed in Market Volatility
Market volatility is not just about how much prices go up and down—it mainly reflects trader emotions, like fear and greed, and the level of trading activity happening in the market.
Fear:
When there’s fear, traders are scared that the market will crash, so they panic and start selling their stocks quickly. This causes prices to drop fast, which increases volatility.
For example, during the COVID-19 pandemic in 2020, the Indian markets experienced heavy selling as fear took over, causing the Nifty 50 to fall sharply.
Greed:
On the flip side, when traders are confident or overly optimistic, they start buying stocks aggressively, pushing prices up. This sudden buying also creates volatility, pushing prices higher. For example – the bull run of 2021 in India when traders were optimistic about recovery and the Sensex hit new highs.
What is the VIX – A Way to Measure Fear and Greed
One way to measure fear and greed in the market is through the India VIX (Volatility Index), also known as the “Fear Index.”
The ‘VIX’, or ‘Volatility Index’, often called the “Fear Index,” is a tool used to measure the ‘level of fear and greed’ in the stock market. It helps us understand how much price movement (volatility) traders expect over the next 30 days.
When the VIX is high, it means traders are nervous and expect big price swings.
When VIX is low, it suggests the market is calm, and traders don’t expect much movement.
In India, we have the “India VIX”, which works the same way. A high India VIX hints that traders are expecting major price changes, usually led by fear of a market drop or rise. On the other hand, a low India VIX means traders are more relaxed, and the market seems stable.
How the VIX Works with Nifty 50
The India VIX closely tracks Nifty 50 options trading. These options show how much traders expect the Nifty 50—a key Indian stock market index—to move in the next 30 days. If traders think there will be large price changes, whether up or down, the VIX goes up.
When traders are worried about a market drop, they buy “puts” (a type of insurance). Puts allow traders to sell Nifty 50 stocks at a fixed price, even if the market value drops. If more people buy puts, expecting a fall in Nifty 50, the cost of these puts increases, and the India VIX rises. So, a rising India VIX signals that traders expect tough times ahead.
VIX Levels and What They Mean
Usually, the India VIX sits in the “low 20s” during calm markets, meaning traders expect Nifty 50 to move within a 20% range. But during times of uncertainty, like the “Adani crisis”, the VIX can jump up quickly. This shows that traders are being extra cautious. The India VIX helps us understand the overall mood of the market, whether it’s driven by ‘fear’ or ‘greed’, and gives traders a sense of how to adjust their strategies.
How to Stay Calm During Market Swings
How to Stay Calm During Market Swings
We know the moments when someone asks to calm down, it triggers the panic more. However, what if instead of telling you to calm down, we tell you how to stay calm during the stormy conditions. Here we have listed six strategies you can use to stay Calm during market swings:
1. Don’t Panic and Focus on Your Long-Term Vision
Markets are always changing; what goes down will eventually come back up, and what goes up can come down. The best example of it is COVID-19 pandemic in 2020. The stock market fell sharply, letting investors believe that this is the end of all. Many people panicked and sold their even long-term investments. However, those who stayed calm and held onto their investments saw the market recover and even reach new highs within a year. Remembering that market fluctuations are normal can help you stay focused on your long-term financial goals.
2. See Market Volatility as an Opportunity
There’s a saying: “Buy the dip.” This means when prices drop, it can be a good chance to buy investments at lower prices. If a company rebounds, your investment could grow significantly as the price rises again. See market dips as an opportunity to averaging down your investment values and increasing your chances of return. You can also use this time to make short-term benefits by adding more value to it.
3. Maintain a Healthy Emergency Fund
Having a solid emergency fund, or a “rainy day fund,” can give you peace of mind. This fund should ideally cover 6 months to one year of living expenses. For example, if your monthly expenses are ₹30,000, aim to save at least ₹1,80,000 to ₹3,60,000. This way, if you face unexpected costs, like medical emergencies or job loss, you won’t feel pressured to sell your investments at a loss during a market downturn.
4. Limit Your Investment Monitoring
Constantly checking your investments can increase anxiety. If you find yourself checking your portfolio every hour, try setting specific times during the week to review it. If you are in the market for the long-term, avoid constantly visiting your portfolio often and wait for the bad time to end. For example, check your investments every Friday. This allows you to stay informed without stressing over daily changes. Remember, this time shall pass too.
5. Rebalance Your Portfolio as Needed
Regularly review and adjust your investment mix to ensure it aligns with your goals and risk tolerance. For example, if you initially wanted to invest 60% in stocks and 40% in bonds, but due to a stock market surge, your portfolio is now 70% stocks, consider selling some stocks and buying bonds to get back to your original plan. This helps you manage risk and keep your investments balanced, even when market conditions change.
6. Quality Over Quantity
When investing, focus on the quality of your investments rather than the number of stocks or funds you own. It’s better to have a few strong investments, like HDFC Bank or Tata Consultancy Services, that you believe in than to spread your money too thin across many mediocre options. This approach helps you focus on companies with good fundamentals, making it easier to manage your portfolio and stay confident during market swings.
By using these tips, you can walk through even the biggest market swings with greater confidence like a South-Indian action movie lead. Remember, investing is a journey, and staying calm will help you reach your destination.
Portfolio Diversification: The RamBan
You know what they say, “Don’t put all the eggs in one bucket”.
To copy up with anything, whether it’s market volatility or sectoral performance, what will work in your favor is your wisely spread investment. It’s important to have a diverse portfolio that matches your risk level. This means including three main types of investments: stocks, bonds, and cash:
Stocks:
Include a variety of stocks in your portfolio. For example, you can invest in large companies like Reliance Industries, as well as smaller companies like Shakti Sugar. Basically, add quality stocks while having a portfolio of different sectors like technology, pharmaceuticals, and consumer goods. This way, if one goes down, the other can bring you up.
Bonds:
In bonds, think about adding government bonds (like Indian government bonds) and corporate bonds from trusted companies such as Bajaj Finance. This helps spread your risk and can get steady, sweet returns.
Cash:
Cash investments, like “fixed deposits (FDs)” with banks like “State Bank of India (SBI)”, are super important for keeping some money safe and easily accessible. They offer stability and a little interest.
As Rob Haworth from U.S. Bank Wealth Management points out, “Right now, economic factors like GDP growth and interest rates look stable.” This stability makes it a good time for Indian investors to keep a balanced mix of assets to deal with market changes effectively.
In Essence
It’s normal to feel worried during times of market volatility. Watching your investments go up and down can be stressful, especially when you see losses on paper. But remember, market fluctuations are just a part of investing, and companies usually bounce back from crises.
To follow through these ups and downs better, consider discussing your portfolio with a financial advisor. They can help you create a strategy that aligns with your goals and risk tolerance. In the end, staying calm and focused on your long-term vision will serve you well. With a diversified portfolio and a clear plan, you’ll be better prepared to handle whatever the market throws your way.
FAQs
Why does the market become volatile?
The market can become volatile due to many factors like economic news, political events, or changes in investor sentiment.
Is market volatility normal?
Yes, some level of volatility is quite normal in the stock market, especially over the long term. Market corrections are also part of the market cycle, which stays longest, but recovers with time.
What should I do when the market is volatile?
Stick to your investment plan, avoid panic selling, and consider long-term goals. Don’t indulge into the current trend, cause not all trends are worth following.
Is it better to invest during high volatility?
It depends on your strategy. Some investors see opportunities during high volatility, while others prefer stability. However, often it’s recommended to “Buy low, sell high” to stay ahead of market makers.
Can I avoid market volatility completely?
No, you can’t avoid it entirely. But you can manage your investments to reduce its impact on your portfolio.
What’s a good strategy for investing in volatile markets?
A good strategy includes diversifying your investments and focusing on quality companies with strong fundamentals.
Can dividends help during volatile markets?
Yes! Dividend-paying stocks provide income even when prices fluctuate, helping to cushion losses.
Are some sectors more affected by volatility than others?
Yes! Sectors like technology or energy may experience more swings than stable sectors like utilities or consumer staples
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Posted Dec 11, 2024
Drafted a simplified piece on market volatility, using market instances and strategies to manage emotions during market swings.
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