Investment Strategy
Navigating Market Volatility: Strategies for Long-term Investors
Akshat Jain, CFA · May 15, 2024 · 4 min read
Market volatility is inevitable, but how you respond to it can make a significant difference in your long-term investment outcomes.
Market volatility is inevitable. Whether it's a global recession, a geopolitical shock, or a sector-specific correction, every investor will face periods when their portfolio drops significantly. How you respond in those moments determines your long-term outcome far more than which stocks you picked.
The psychology trap
The biggest enemy of long-term returns is not the market — it is the investor's own behaviour. Studies consistently show that the average investor dramatically underperforms the market because they buy when markets are euphoric and sell when markets are panicking. This is the exact opposite of what creates wealth.
"Be fearful when others are greedy, and greedy when others are fearful." — Warren Buffett
Five strategies that actually work
1 Asset allocation is your first line of defence
A portfolio with the right mix of equity, debt, gold, and international assets will inherently be less volatile than one concentrated in a single asset class. When equities fall, gold often rises. When Indian markets correct, international exposure may hold. Diversification is not just about more stocks — it's about truly uncorrelated assets.
2 SIPs work — but only if you don't stop them in a crash
A Systematic Investment Plan (SIP) buys more units when markets are down and fewer when markets are up. This rupee cost averaging is powerful — but only if you continue the SIP during the downturn. Most investors do the opposite: they pause or stop SIPs when markets fall, defeating the entire purpose.
3 Rebalancing is underrated
If your target allocation is 60% equity and 40% debt, a market crash might push it to 45% equity and 55% debt. Rebalancing — selling debt and buying equity — forces you to systematically buy low and sell high. It's disciplined, unemotional, and effective.
4 Maintain an emergency fund — always
The investors who are forced to sell during a crash are often those who had no liquidity buffer. If you lose your job during a recession, you should not have to sell equity at a 30% loss to pay rent. 6-12 months of expenses in a liquid fund or FD protects your investment portfolio from being disrupted by life events.
5 Time in the market beats timing the market
Data consistently shows that missing just the 10 best days in the market over a 20-year period can cut your returns in half. Those best days often occur right after the worst days — when sentiment is at its bleakest. The only reliable way to capture them is to stay invested.
What to actually do during a crash
- →Do nothing with your existing investments unless your financial plan has fundamentally changed
- →Continue your SIPs — this is exactly when they work best
- →If you have surplus cash, consider deploying some into quality assets at discounted prices
- →Rebalance your portfolio back to your target allocation
- →Stop checking your portfolio daily — it serves no purpose and increases anxiety
Need help navigating your portfolio?
Market volatility is easier to handle with a clear plan and a trusted advisor. We'd love to help you build one.