What to do in a Volatile market

In the first week of March a retired gentleman called me asked what should I do with my investments in mutual funds as the market has crashed? I just asked one question, do you need the money? He said no. My advice was then just hold on. A few days later he again called, saying my debt funds have also fallen and again I asked him the same question and our replies were the same. This gentleman now was very frustrated as he was losing money and did not know what to do. The thing is, was he really losing money or that losing money was just in his mind. More often than not, it is usually in our mind. The market is an unknown beast and we are trying to tame unknown and milk it. This is our problem.

Why do we want to go into unchartered waters without even learning the basics? My advice to such persons is, just do regular asset allocation. If we have decided to keep 50% of our financial assets in equity and the balance in debt, then on a regular basis just ensure that you are maintaining that balance. This will help in lowering the risk of your portfolio. Asset Allocation is the most boring job. We want excitement, but this most boring job helps keep our portfolio safe. This is what most of us want. We are ready to keep our money in fixed deposits in the name of safety, which is also boring, then why not asset allocation with higher returns and a little higher risk compared to Fixed Deposits.

Over a log period studies have shown that regular rebalancing even once a year has given better returns than doing nothing. Rebalancing is necessary because different asset classes give varying returns over different periods of time. Because of these varying returns, the asset allocation changes over a period of time. Regular rebalancing helps in restoring the asset allocation and also reducing the risk. In the bargain, you tend to book profits from the asset class which has grown and purchase at a lower price the asset which has not grown to the same extend. Mind you, we are not timing the market, but we are still booking profits on a regular basis.

So do not let your emotions drive your decisions, just do regular rebalancing. If you find it difficult, just go for professional advice.