How do you invest when the stock market is volatile?

Anything that goes up, has to come down!

It’s the law of nature; anything that goes up eventually has to come down. This is true as well for the stock market. The market is currently going through a period of consolidation (a term used to indicate uncertainty!), which is a good thing in the long run as it indicates stability rather than speculation. So how does one handle such a period of uncertainty? Do we wait or exit or buy?

Be greedy when others are fearful

Crowd behaviour is a complex thing. We all try to follow the crowd; we rarely lead the crowd. The buzz about the market is optimistic. Everyone is buying stocks since the NDA government came to power. But ask yourself the question, where were you in Dec 2008? Look at the chart below of the Sensex:

In 2008 fear was gripping the world with the financial crisis and doomsday talk. If you had nerves of steel, you would have bought stocks at throwaway prices. But the question now is, are we in the greed phase of the markets?

Warren Buffett famously quotes

“Be greedy when others are fearful and be fearful when others are greedy”.

It’s as much psychological as technical; emotional intelligence also matters while investing in stock markets.

Our own big bull of India (Rakesh Jhunjhunwala) says: Exit the market when the pan-walas or chai-walas start recommending stocks to buy. It’s an euphemism for market being overpriced and over optimistic. Greed!

Law of Averages

Saying this, one should not time the market at all. One should systematically invest a fixed amount every month or quarter, irrespective of the market conditions. In this way you would have bought in 2008 as well as the high in 2015! As you systematically buy, you are averaging the purchase price, which reduces both the losses and unreasonable gains. If you would like to be a bit more risky, you would invest more in periods of extreme pessimism in the economy. If you believe in the long term India story, you should not be concerned about ups and downs over a short period but keep the bigger picture in mind.

Time in the market

As the experts put it:

   “Time in the market is more important than timing the market”

If you are investing systematically, you should be ready to be with your investment for at least 7-10 years. This way you would make good returns that beat inflation and fixed income instruments. As they say “Patience is a virtue”. Even more so when investing in the stock market.

Attitude over Aptitude

Investing is 80% attitude and 20% aptitude. Leave the 20% to the professional advisers and develop the 80%, which would enable you to build long-term wealth. Don’t stop investing in mutual funds just because of doomsday predictions, or change in governments. Balance out greed and fear! In fact, the greatest investors in the world score over everyone else only due to aptitude and character. Technical terms, methodologies and investing philosophies can be learnt and applied, but to withstand a market crash/correction and retaining conviction during tough times is only through strong character.

For instance, Rakesh Jhunjhunwala purchased the shares of ‘Titan’ at the rate of INR 5.0 in 2002-2003. The price raced to INR 80, sounds awesome! But the price went on to fall to INR 30. Humpty Dumpty had a great fall. He, however, did not sell a single share the entire time, Titan now quotes at INR 327. He made at least 60 times the investment excluding the dividends. All because he waited patiently and didn’t give in to the volatility in the market and the accompanying sentiment.

Knowledge is important to build conviction to hold any investment, and character is is crucial to make prudent choices that buck the market sentiment. Go on, build those nerves of steel along with a strong foundation of investing knowledge.

Arjun Balakrishnan is an investment fanatic who loves writing about investment topics. He regularly writes at Investment Gyaan.