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Four ways to manage volatility when investing towards long term goals

With volatility a certainty when investing in equity as an asset class, how does a reasonable investor stick to the cause? Here are four things you can do so that volatility doesn’t come in the way of your long-term goals.

The stock market many a times doesn’t give investors much to smile about. For those investing towards their long-term goals, this can be an uneasy feeling. Seeing their corpus drop in value because of a bad market month, or even months, makes many investors doubt the asset class. 

With volatility a certainty when investing in equity as an asset class, how does a reasonable investor stick to the cause? Here are four things you can do so that volatility doesn’t come in the way of your long-term goals:

1. Invest in the best of the economy

Investing in equity means investing in the future of the companies that will grow with the economy or even more. This means investing in the best companies that represent the economy of today, as well as, tomorrow.

The simplest and smartest way to do this is to invest the majority of your long-term oriented savings in large cap and diversified (multi-cap) mutual funds. Such mutual funds invest in the best companies on the stock market. These companies are not just the best the economy of today offers but also in most cases tested and relatively stable. Diversified mutual funds pick from across market capitalisations and represent both the present and the future of the economy.

Your mutual fund's asset manager does all the heavy lifting of choosing the best among the hundreds of stocks listed on the stock exchange. 

Volatility often reflects the sentiment of the market players, among other things, and changes with time. But it doesn’t really predict long-term future. There will be survivors, winners, and losers. Choosing among them is best left to professionals from asset management companies who are trained for it and have been doing it for a while.

2. Assume the asset class return rather than a specific fund’s returns and not more in your planning – this can change periodically

Know the most appropriate rate of return for equity. Historically the returns have been about 12% or slightly more. This stands for future planning purposes, especially keeping in mind inflation trends. Equity generally stays much ahead of any other asset class when the time frame is in decades. 

The rate of return can also shift in the future depending on the performance of the national and global economy. Keep this in mind. The primary return goal when saving for long term goals is to stay ahead of inflation.

You can’t control volatility. What you can control though, is your own planning and mind. If your goals are clear enough and planned for well enough, volatility should be the least of your concerns.

Invest in equity only if you are capable of holding on to your investments for a period of seven years or more. If you decide to invest in equity, consider it to be a “locked in” investment in your mind.

3. Before you invest, decide to treat it like a locked-in investment for a decade at least

It is self-defeating to invest in equity for your long-term goals with a short-term mindset. If you are looking for results within 2-3 years, there is a high probability that you will be disappointed.

Invest in equity only if you are capable of holding on to your investments for a period of seven years or more. If you decide to invest in equity, consider it to be a “locked in” investment in your mind.

If the fund that you actually invest in underperforms its benchmark (Sensex or Nifty) for more than two or three years, then consider changing funds. This, however, doesn’t mean you exit the asset class itself.

4. Invest enough in fixed income

Before you even think equity or long-term goals, you should have your emergency fund with four months of income set up in a bank fixed deposit or a liquid fund. You should also allocate enough in good quality short term debt funds to cater for short terms goals (timeframe is 5 years or less) that are critical to your life.

How your equity portfolio performs should not affect your short-term financial standing.

These four actions should help you to stay true to your long-term investing objectives, no matter what the markets do in the short run.

 

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