Market volatility is not solely the result of stock-related news; it can be observed during recessions, wars, global crises, and pandemics such as COVID-19. Although most people believe stock market volatility means loss of capital, it is not necessarily the case. If you have made a firm decision to invest strategically from the beginning of your share market journey and have cautiously avoided risky and sentiment-driven decisions, stock market volatility can be an opportunity.
In this blog, we will discuss the importance of a value-focused portfolio and how it helps in safeguarding your capital during stock market volatility.
Decision-Making In A Volatile Market
A volatile market is characterized by sharp fluctuations in the prices of stocks or commodities due to recent news or events. Certain factors contribute to this volatility, including inflation, interest rates, global instability, unexpected quarterly results, and market emotions.
Some people enjoy investing in market volatility, while some refrain from it. Therefore, decision-making in a volatile market becomes crucial, and that is why a value-focused portfolio works well in these circumstances.
Understanding Value Investing
Value investing involves buying fundamentally strong stocks at a price significantly lower than their intrinsic value. During a volatile market, the price of fundamentally strong stocks may also decline due to people’s fear. This fear is temporary, but it creates an opportunity for value investors.
Volatility in the stock market causes:
- Overreaction by investors forces them to take irrational decisions.
- Mispricing of stocks due to panic selling.
- Increased risk and reward.
A disciplined investment strategy during market volatility will help you sustain in the stock market, and it will also become beneficial during market recovery.
Performing Well in Times of Market Volatility
To perform well in times of market volatility, a clear value investing strategy or set of principles is required to outperform others and mitigate risks.
Define Your Investment Objective
Most people fail because they haven’t defined what they are seeking from the stock market. Whether it is short-term or quick profits, early retirement dreams, managing expenses, or earning dividends, a clear investment objective helps in sticking to the investment strategy and avoiding risks.
Setting clear objectives will help define your risk appetite and will make capital allocation easy.
Focus on Strong Fundamentals
One of the most logical things to do in general or during a volatile market is to focus on strong fundamentals instead of chasing short-term trends or news. Fundamentally strong stocks will always outperform stocks that are in an uptrend just because of recent developments or news.
Fundamentally strong stocks provide:
- Earnings Stability
- Strong Balance Sheet
- Good Return on Equity (ROE)
- Long-term Investment Advantages
- Consistent Growth
- Low Risk
- Competitive Advantage
Diversify Across Sectors
During market volatility, the margin of safety is very low as all stocks, whether fundamentally strong or not, perform badly. Different sectors are affected differently, and this is why diversifying across sectors becomes crucial in mitigating risks.
We have noticed this during the COVID pandemic, when most sectors were underperforming, sectors like healthcare, consumer goods, and energy did relatively well.
This is why diversifying across sectors is an essential value investing strategy, because many times, undervalued sectors may not perform as expected.
Include Dividend-Paying Stocks
Including dividend-paying stocks is a mature portfolio allocation strategy as these stocks ensure regular income, mitigating stock market volatility risks. Dividend-paying stocks provide stability when other stocks don’t perform as expected.
Maintain Capital Reserves
When there is a sharp decline in the market, and even after investing in fundamentally strong stocks, your investment can reflect huge losses for the time being. In such situations, your capital may be fully deployed, and when the stock market starts showing upward momentum, you won’t have liquidity to invest further.
This is why maintaining capital reserves is a smart move that will allow you to buy fundamentally strong stocks at a much lower price.
Avoid Emotional Investing
The most important part of investing, if you are chasing value and not trends, is to avoid emotional investing at any cost. Emotional investing can look lucrative, especially when the stock market recovers after a volatile stint, and you find some fundamentally weak stocks touching new highs daily. These situations can tempt you to abandon your logical and rational thinking abilities and act emotionally. This is the perfect test of your patience as a strategic investor.
Volatile Markets Test Conviction
Volatile markets test your patience, your conviction, and your ability to stick to your investment strategies. Instead of acting in panic or excitement, a value-based investor uses these sharp declines to buy fundamentally good assets at a discounted price. It takes a lot of time and experience to develop these attributes.
If you are starting your stock market journey and want to safeguard your capital, make knowledgeable decisions, and learn the basics, join Strategic Alpha’s ‘The Conviction Club’. It’s a membership program for investors who want to make informed decisions in the stock market, stay rational in their approach, and develop a broad understanding.
FAQs
Q1: What is a value-focused portfolio?
A value-focused portfolio is an investment strategy that involves buying fundamentally strong stocks at a price significantly lower than their intrinsic value during a volatile market.
Q2: How do you find undervalued stocks?
To find undervalued stocks, you can use a set of methods such as checking valuation ratios, analyzing financial strength, and evaluating competitive advantage.
Q3: Is value investing good during volatile markets?
Yes, it can be a sensible strategy during volatile markets, as investors tend to make emotional decisions during volatility by involving themselves in panic selling and whatnot. This creates a space for value investors to act sensibly and buy fundamentally strong stocks at a very low price.
