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Are you a newbie in the equity market, or have you entered but never witnessed a bear market to fathom the losses you have been incurring on your portfolio?
In the aftermath, we often invest with the anticipation of lucrative returns, counting on the market’s continual growth. However, when faced with a market correction, we find ourselves ensnared in psychological setbacks, realizing tangible and often irreparable financial losses.
If we look back, doesn’t it question you that you actually entered to make profits but ended up with unfathomable losses?
That’s where we are not realizing the gravity of the risk we might have to take for an investment in the equity market
Equities Do Give Unimaginable Returns
Yes, it is indeed true that equity yields returns you might not have imagined and, in fact, surprises you with the profits you have made in the portfolio. But don’t forget that if you are investing 60% of your portfolio in stocks, then you have to be open to a risk of 20 to 25% to anticipate returns.
If your expectations of returns exceed more than 25–30%, investing more than 60% in equities with high risk can only achieve that. Now the question arises: is it really worth the risk you want to take?
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The Gaga of F&O Trading
Futures and Options Trading is everywhere on social media, alluring about how much more money it can make for you. Here’s a fact: 90% of traders lose money, and most of us don’t want to swallow that truth but rather continue being in the spell of the way that it can make money for you without realizing it can even take money away from you.
This fact gets more evident when the finfluencers selling the trading course in the name of teaching trading are not profitable by actually trading but by selling the course to you. If the influencers making money from trading were to be true, then aren’t they making enough from trading already? There is no reason to sell the courses at all.
The Volatility Takes Over Your Mind
We often think volatility equals risk, but that isn’t true, as they are two different factors to weigh.
‘Volatility represents the market’s struggle to align a specific security’s price with its true fair value at the given moment.”
It doesn’t signify any potential risk. But people often consider it a notional loss to make actual losses. It is also true that it is quite good to be associated with an instrument that has less volatility and is good for portfolio risk.
If the inherent value of the company is intact, then stock price volatility is not a concern at all for the long term. If you can’t differentiate it, then you end up at a loss that wasn’t a necessity.
For instance, Adani Enterprises’ company value was shaken; expecting a risk and selling it at this point is necessary as it speaks of risk.
If the Nifty 50 fluctuates for a time, it isn’t about risk; it is about volatility at the moment because the inherent value of the 50 companies isn’t shaken yet to consider the dip as a risk. Because there are 50 companies associated there, though a few of the individual stocks dipped by 18%, the Nifty has still risen by 7%.
This must clarify the concepts of risk and volatility.
You can comprehend volatility in a less volatile market in a more appropriate way than in a highly volatile market. No wonder, although a highly volatile market can create a panicking moment, a less volatile market can help you understand the underlying concept of volatility without panicking to take any action accordingly, regardless of the intensity of the volatility.
How To Leverage Volatility?
Diversifying Isn’t Simply Hyped
We hear about diversifying almost everywhere, but most of us don’t necessarily understand why they even have to. If the Adani Group stock was the only thing you had held, its unimaginable losses would be hard to decipher, and even if you held until it recovered, the net result for it to put you in zero or negligible losses takes time.
If you had invested in other instruments at the same time, the loss would mean nothing and also help you to be profitable later in less time. If you had been invested in a corporate bond or corporate FD, for instance, you would not only be earning interest but also getting your principal back on maturity compared to stock, where both capital and gains are at risk.
A diverse range of assets, spanning stocks, bonds, mutual funds, ETFs, real estate investments, and cash equivalents, strategically diversified across various markets and sectors, is quite essential in a portfolio to tackle risk.
It simply means that if one instrument goes down, there is another to save you from the sinking ship. Ensure you have at least 30% of your portfolio with bonds in it.
How Does Diversification Help Investors Grow Their Portfolio?
Rebalancing Doesn’t Hit You Hard
Markets won’t be in the same position as you think at all times. When something rises, there is always a fall associated with it. You must consider rebalancing the portfolio at least once a year. Meaning that when it is at its peak, if it has made you profit, consider booking it. When it crashes, you can re-purchase it at lower prices to make essential profits again.
That way, you are not affected by pitfalls in the market. Only a few people consider rebalancing because many don’t know their exits and entries, but if you adhere to it, the impact of any situation in the economy shouldn’t affect your portfolio.
The Wrap
You don’t necessarily have to take more risks than you can tolerate to make better returns. If you handle your portfolio well, it’ll make as much as you anticipate. Even if the risk-takers luckily make greater returns, they might not be good at facing volatility, managing risk, diversifying, or rebalancing their portfolio.
If you think it is worth taking more risk than you can tolerate, it’s a lesson that will come the hard way.
