How to manage investment risk in a volatile environment

Atul is 42 and has worked hard to build a portfolio of equity shares to create a retirement corpus. However, the dramatic swing in the markets has made him question his investment strategy. Should he take the risk with his funds, earmarked for his retirement approximately 15 years away? Should he stay invested in this volatile environment or change his asset allocation in favour of less volatile asset classes such as debt or real estate? Is this a good time to make the switch, he wonders.

Long-term investors such as Atul must remain calm through periods of volatility. Making dramatic changes to his portfolio at times of extreme market volatility could prove detrimental to his wealth. Since he has invested with a certain investment horizon and plan in mind, he must have been fully aware of the inherent risks of equity and the potential long-term returns. His equity investment provides him the best opportunity to meet his retirement goal which is a long time away. If he quits at this time out of panic, he will not only miss out on the possibility of an uptick when he is away, but will also be hurt in terms of an overall fall in return on his investment.

A better choice is to hold back from investing more in equity. Let us assume that he had 70% of his money in equity. His equity exposure would naturally come down as his existing holding would have moved down, and he is not putting in fresh money. The only downside to this is the lost opportunity of investing in a falling market, but that call is tough to take for most investors. Staying invested is a tough decision when the money continues to lose value in a falling market and the future is unpredictable in a rapidly evolving global situation.

Equity markets are subject to cycles of volatility. Market volatility is a reminder for Atul to review his investments regularly and make sure he has a welldiversified portfolio. It may be natural to react emotionally, but at such times it is extremely important to not get carried away and liquidate or accumulate more until the situation settles down.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)