Equity markets are inherently volatile by nature. Short-term volatility is not necessarily indicative of a long-term trend. There are a number of variable factors that affect the performance of markets, many of which are beyond the comprehension of an individual investor.
When volatility in markets is passed on to the investment portfolios of individual investors, there is a possibility of under-performance of one’s portfolio vis-a-vis the benchmark. Before comparing the performance of a portfolio, ensure that it is pitted against the right benchmark, else the whole assessment exercise is in vain.
The first rule to make an all-weather portfolio is to select stocks after making proper due diligence about the business, management and future potential of the business.
Understand reasons for the under-performance
To start with, one should dig deeper to understand the reasons for the under-performance of the portfolio. One of the common reason for the divergence in the performance of a portfolio is the constituents- a portfolio may not necessarily mirror the constituents and weightage associated with every stock in the benchmark. One would have to bear with the deviation in portfolio’s performance due to this reason if one wants to retain the distinctiveness of his portfolio from the benchmark.
Another reason for under-performance can be the allocation in the portfolio- the distribution of ‘growth’ and ‘value’ stocks/ sectors in the portfolio. In rising markets, the ‘growth’ stocks outperform the markets and command high valuations. In intermittent corrections, these stocks happen to witness re-rating in their valuations, and hence, see a correction in prices. It would be a prudent call to analyse the valuation of growth stocks in turbulent times. If the long-term growth story is intact, one must look at adding more at different price points with a long-term investment horizon. Take the help of your financial advisor to assess the valuation and the investment rationale of the stock.
Avoid herd mentality
Time and again, it has been statistically proven that investors follow a herd mentality. Markets react to reasons that are beyond the comprehension of an average investor. Many a time the investor extends the same analogy to specific stocks in his portfolio without giving a thought to whether the changed conditions have led to any changes in the fundamentals of the company. An investor should not panic, practice patience, have faith in his investment and avoid unnecessary churning of his portfolio.
Invest more in volatile markets
Investors should not get carried away by the short-term volatility of the markets and the temporary under-performance of the portfolio. Use the opportunity to recheck the fundamentals of the stock. If convinced about its potential infuse add more of the stock at lower levels.
WHEN IN DOUBT
- Check if market volatility is indeed impacting stocks in your portfolio
- Be patient and don’t panic
- Use temporary under-performance to invest more if sure about stock’s potential
The writer is MD & CEO, Axis Securities
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