Volatility: What should mutual fund investors do?

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Many mutual fund investors are scared of the term volatility these days. The wild swings in the stock market – 1,000 points down one day, 900 points up another day – are making many investors very anxious. New investors and Do It Yourself or DIY investors are the worst hit. What should you do?

According to mutual fund advisors, existing investors should only acquaint themselves with the term volatility once again. They say many investors are anxious because of the phenomenal returns they have made in the recent past. These investors are anxious that the gyrations would rob their gains. These investors should revisit their early lessons and that will reassure them, say advisors.

What lessons are they referring to? Well, you must have heard ad nauseum that volatility is part and parcel of stock market investing. You can’t avoid volatility if you are investing in stocks for a very long time. In fact, not just volatility, you should be prepared for a bear market also if you are a longtime investor. Here we are not referring to daily up and down movements but persistent depressed market conditions.

Seasoned investors would remember markets moving only down for months. In fact, market pundits say whenever the market witnesses a bull run like the recent past a steep correction in the market is very likely. Then the market gets nervous and swings wildly until there are firm clues.

As for protecting your returns, taking the money out of the market and getting in again at a time when the market is ready to take off is a sure way, according to many nervous investors. Well, that may work for you if you can time the market well. If you remember your lessons that it is impossible to time the market, stick to your asset allocation and continue as per your investment plan.

Also, you can remind yourself about the long term returns you are expecting from your equity investment. Well, most of us take 12% returns when we are calculating for long-term goals. Then what about 30% returns you made on your equity portfolio last year? Well, stock market returns are not linear. One year you will make 50%, then you may make negative returns… that is how you make an annual return of 12%.

That brings us to new investors. Are you nervous because you are not familiar with equity investing? If that’s the case, educate yourself and try to make you understand the nature of equity investing. If you are still sleepless, you should revisit your investments. Make sure you have the risk-taking ability to invest in equity. Also, ask yourself if you are willing to take risks. These steps would offer you clues.