Market volatility, characterized by abrupt price swings and heightened uncertainty, has the potential to evoke fear and trigger impulsive reactions among investors, which may inadvertently compromise portfolio performance. Nevertheless, astute long-term investors perceive market volatility not as a threat but as a strategic opening. By extending their investment horizon and embracing a patient approach, they recognize volatility as a conduit to capitalize on discounted asset prices. In this dynamic landscape, volatility acts as a mechanism for transferring wealth from those who hastily liquidate investments to patient investors who possess the foresight to weather market fluctuations. Thus, for the discerning long-term investor, volatility unveils an avenue for strategic wealth accumulation and sustainable portfolio growth.

Understanding that volatility is inevitable is the first step. Avoiding the market altogether is not the solution, as it exposes investors to the erosive effects of inflation. So, what should you do? The ideal way to manage volatility is through proper diversification of portfolio (goal-based and international) followed by having some money invested in a contrarian investment strategy. Just as a single unsuccessful fishing trip doesn’t imply barren oceans, one failed investment shouldn’t deter further investment. Diversifying portfolios across investment strategies, styles, and asset classes, including international exposure, mitigates volatility risk.

Diversifying your portfolio across different investment strategies (absolute returns, long only), investment style (deep discount, value, growth) and asset class (equity, debt, commodities) can help significantly to lower the volatility of the overall portfolio, that are otherwise more volatile on a standalone basis. Furthermore, investing in market non-directional strategies (like options, arbitrage, long/short) to achieve consistent returns across different market conditions.  

• Goal based investing is another way to lower portfolio volatility. Investing towards specific goals like children’s education, retirement, and buying a house, helps you to time your investments, thereby selecting the right product that matches the investor’s risk appetite.
• International investing also helps in reducing market volatility. According to a recent report, India contributes only 3.6% of the world market-cap, which means plenty of investing opportunities are available globally and might not be available in the domestic market. Also, sovereign, and corporate bonds across international markets will provide an extra edge to your portfolio.
• Asset Class Diversification: Amidst concerns about high market valuations, some advocate for profit booking and diversification in periods of heightened volatility, reallocating a portion of equity holdings into the debt segment can mitigate short-term risks and provide stability. Debt instruments offer relatively stable returns and income generation, reducing portfolio dependence on volatile equity markets. However, investors must balance risk management with growth objectives and seek professional guidance to align with their financial goals and risk tolerance. Ultimately, strategic portfolio adjustments amidst volatility present opportunities for long-term financial success.

Embrace a Contrarian Mindset: In times of heightened market volatility, adopting a contrarian mindset can be particularly advantageous. Contrarian investors thrive on market irrationality, capitalizing on opportunities when market sentiment diverges from fundamental realities. Instead of succumbing to fear or greed during periods of volatility, contrarians maintain a rational approach, buying when others are selling and selling when others are buying. In short, it emphasizes on the importance of buying undervalued assets and avoiding overvalued ones. By going against the crowd, contrarian investors position themselves to profit from market mispricing and sentiment swings.

Key traits for investors include discipline, patience, and independence from herd mentality. Systematic and staggered investing (SIPs), evident in the growing market participation through mutual funds, PMS, and AIFs, counters volatility. Comparing portfolios with others overlooks individual differences in strategy, timeframe, and risk appetite, emphasizing patience as pivotal for wealth creation.

Is this applicable only for equity investing, and not for debt investing: This strategy holds true for both equity and debt investing. During times of market volatility, debt investors can strategically leverage interest rate dynamics, credit risk assessment, and private credit investing to navigate uncertainties and capitalize on opportunities. With interest rates prone to sudden shifts, investors can adjust portfolio duration to mitigate potential losses or seize opportunities presented by changing yield curves.