How to stay afloat and make money during volatile market?

Equity markets are on a roll over the past year-and-half, though there were small corrections including about the recent 10 per cent over the last week. The valuations have remained high all through this journey relative to the history and investors sitting on the sidelines for a perfect entry never really got an opportunity. Its only those who've invested and stayed throughout had made the monies. So, the constant fear of a correction has deprived those investors to make good returns.

The liquidity conditions, absence of better alternatives and the overall risk-on mode across the spectrum of the investors had enabled the current boom. It's anyone's guess of what would come in the immediate future and how would the markets perform. One must understand that the markets are slave to earnings in the long run, always. While the earlier reasons were reasons for the current boom, the catalyst has been the improved earnings and growth prospects of corporate India for the elevated levels of the markets. At such instances, it's tough to make fresh investments or even to stay invested. While the greed of higher returns is punctured by the fear of market correction and that's why the heightened volatility. So, should one turn defensive and change the allocation altogether or even stop investing further into the market? Both the choices could turn counterproductive evident from the recent market rally. What are the options with the investor then? The better way to approach these situations is following these simple steps.

One must always have the goals well-defined; this helps to remain rational in such uncertain times. In a goal-based investing, we're clear about why the investment is made and have defined timelines allowing us to remain focused or not waver from them. This helps in not giving to the market emotions while remaining invested for the goal. Please remember that only those who stayed invested would realize the gains.

Asset allocation is always key but takes prominence in these situations. And creation of a portfolio is critical. A portfolio of assets or securities would allow the investor to have a better exposure across the markets and its various segments. Of course, it's imperative to derive allocations based on one's risk profile and timelines. A well-suited asset allocation allows investors to enjoy better risk adjusted returns.

Diversification is another vital aspect one should be aware of. Building a portfolio with lesser correlation among the securities helps in countering the market cycles effectively. Even in a raging bull market there would be assets or securities that could remain unaffected and one could judge if there's value involved in them. A contrarian approach with a decent allocation not only reduces the risk but also enhances returns to the portfolio.

Also, it's important to rebalance the portfolio, even frequently if required. This allows trimming down an asset or security which has run up too quickly and by reducing the exposure leads to contain the risk associated with it. It also helps in avoiding misallocation bringing a much-needed balance to the portfolio. Rebalancing of portfolio allows one to participate across markets while allowing one to retain gains or reduce losses in the portfolios.

One could also have a portion of money partitioned as sin-money for wagering. This is earmarked for tactical allocation within the portfolio, though, should be done within their respective risk tolerance levels. Often, investors fail to distinguish these bets and treat such allocation to the larger portfolio leading to losses or unproductive assets within the portfolio. So, this mayn't be suitable for all investors and should take a judicious call.

Another trick is to stick to systematic investing or staggered investing. Employing Systematic Transfer Plan (STP) or Systematic Investment Plan (SIP) allows in exposing the capital at regular intervals and thus reducing risk of loss in cases of sudden fall in the market. Also, one is left with dry powder to take advantage of such falls by infusing part of the money. However, these solutions won't possibly provide for a fool-proof strategies. But it certainly helps in countering the market volatility to a great degree while allowing one to move out of the inertia.

(The author is a co-founder of 'Wealocity', a wealth management firm and can be reached at [email protected])