With the Sensex swinging by several hundred points every now and then, Atul is a worried man. He has worked hard to build an impressive asset portfolio over the years. He has been investing in equity shares with the objective of building a retirement corpus. However, the dramatic market swings are now making him question his investment strategy. Should he continue to invest in equities to fund his retirement 18 years away? Or should he reduce or eliminate any exposure to equity to stem any losses and get his peace of mind back?
Long-term investors like Atul must remain calm through periods of volatility. Making dramatic changes to his portfolio during volatility can negatively impact his long-term goals. Atul has invested with a certain horizon and plan in mind. His equity investments provide him the best opportunity to meet his retirement goal in the long run. If he quits at this time out of panic, he will lose in three ways: One, the opportunity of investing at lower prices. Two, the possibility of missing an uptick when he is away. Three, the possibility his money would be deployed at lower rates of return. A better choice if he can overcome his fear would be to hold back investing more in equity.
Let us assume that he has 70% of his money in equity. His equity exposure would naturally come down if he refrains from putting in fresh money. The surplus that is now being invested in debt will automatically rebalance his portfolio and bring equity exposure to less than 70%. The only downside to this is the lost opportunity of investing in a falling market, but that call is tough to make.
Staying invested is a tough decision when money continues to lose value in a falling market. However, investors like Atul must realise that equity markets are subject to cycles of volatility. Market volatility is a reminder to review investments regularly and make sure one has a well diversified portfolio. It may be natural to react emotionally, but Atul must work to a plan, so he can make the volatility work favourably for him.