Global equity markets, including in India, have recently shown tremendous volatility. This resulted from the US Federal Reserve announcing the potential interest rate hiking cycle to commence from March 2022 and the breakout of the Russia-Ukraine war. Crude oil prices have risen to unprecedented heights, and companies’ growth expectations have reduced. With increasing geopolitical tensions, investors have started to sell shares in large numbers, hoarding precious metals, including gold.

If you are a novice investor, what should be the recommended course of action under such market conditions?

Should you sell shares and exit equity markets, or should you stay invested?

To understand whether to stay invested for the long term or exit markets during short-term volatility, you should understand the following principles of investment:

  1. Create a diversified portfolio with investments in uncorrelated asset classes. You should also build a diversified portfolio of equity shares/mutual funds by industry, sector, geography, and security. You can open an online trading account and undertake online investing to achieve this.
  2. Your portfolio of equity stocks should consist of 10-15 companies with strong corporate fundamentals and sound management. The stocks should also be reasonably valued when you invest in them. You should analyse parameters like the price-to-earnings ratio, price-to-book ratio, return of equity, total assets, and cash earnings per share to be sure of the company’s fundamental strength.
  3. World-renowned investor Warren Buffett recommended staying the course in equity markets during the current conflict. He said you should not become fearful and hoard gold or cash but stay invested. This is in keeping with the “Buy when other market participants are fearful but sell when the market is greedy” or buy low and sell high philosophy. This philosophy should be adhered to during market turmoil because every crisis brings an opportunity. Online investing can help you stay the course.
  4. Invest small amounts steadily and engage in rupee cost averaging during market lows and highs. This way, the weighted average cost of your investments comes down. Apply prudent stop-loss limits to your orders and buy in small increments. You can achieve this objective through online investing.
  5. Markets are fast-moving and chaotic. Volatility is the essential nature of the equity market. Do not become overcome by sentiment. Maintain a proper emotional distance from your trades.

The following historical chart tracks the movement of the BSE-Sensex 30 over the past 25 years.

This chart clearly shows that in periods of turmoil like the global financial crisis of 2008 or the onset of the COVID-19 pandemic, the Sensex plunged sharply, subsequently recovering to reach greater heights. The chart clearly shows the merits of staying invested in the long run.

Key takeaways

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If you are a young millennial pursuing your professional career and investing in equity markets to generate a secondary source of income, the first thing you must do is hold a demat account with a trusted stock broking app. You should consider the merits of long-term investing. Manage surplus funds through online investing. Follow the advice of Warren Buffett, the guru of investing and markets, to stay the course. Markets are fundamentally volatile; therefore, an objective mindset and adequate emotional distance are imperative. This is the true path to wealth maximisation in the long run.