Every investor eventually meets a stock that rises sharply, falls just as quickly and tests their nerves. Stocks tied to power, heavy engineering and clean energy are classic examples. Watching the BHEL share price drift for months and then surge, or seeing the Suzlon Energy share price leap on a single announcement, can tempt even cautious people into reckless decisions. The remedy is not to avoid such sectors entirely but to adopt habits that make volatility manageable. This article outlines practical routines that help you participate sensibly while protecting your finances and your peace of mind.
Define Your Purpose Before Buying
Commence by asking yourself what role a stock will play in your portfolio. Can it provide growth over a period of ten years? Will it yield a quick gain or simply act as a diversification tool across your holdings? A defined role will dictate how long an investor must hold the asset and, therefore, what would motivate them to sell it.
Write the reason in a single or double sentence. You may want to state, for example, that increasing electricity demand will cause order growth in the future over a certain next five-year period. The motivation to get out is logical when the reasoning behind buying is proven fallacious over a period of time. Without a reason to invest in the first place, people hold on too long to losing stocks and sell the winners because they have nothing to contrast against.
Size Positions Carefully
Position size is your first protection against volatility, but if a certain volatile stock constitutes only a small amount of the portfolio, then a large depreciation will still not hurt. If a stock makes up a larger amount, then a single poor quarter can throw an investor off course for years.
Many people choose a simple strategy of limiting the percentage of any single stock in the overall holding, while volatile ones can constitute even a smaller proportion. Size this according to your age, stability and obligations. It is wise to be more conservative if there are dependents in your household that will suffer if you lose income than if you are young, single, employed steadily and have many years ahead.
Stagger Your Entries and Exits
Trying to catch a bottom or peak is not an easy game, so staggering your entries is a great way to get average price of a security. You can buy a stock several times over a span of months to avoid getting caught on the downside. It will also give you breathing room to check on quarterly results and management commentary before doing any more buy transactions.
The same goes for exit as well, when an investor has had a big gain, they could sell it off in percentages rather than one transaction. Selling some stock means that an investor has locked in the gains and still has room to grow their investment, if the situation permits. It is also a fact that taxes can affect the long-term value of investments and therefore it is paramount to keep in mind the difference between short- and long-term when selling shares or units.
Use Information Wisely
Volatile stocks invite rumour; every message board, influencer and ‘tip’ is bursting at the seams with information every day that the stock has moved. There is more ‘information’ around than most people have time to read; much of it is nonsense or trying to get you to buy or sell without knowing what effect it will have on your overall strategy.
Do not make trading decisions based upon ‘information’ from newsletters, forums or third parties, but rather stick to company statements, official news releases, earnings calls and the like, and look for what this means for revenues and operations. When you see a ‘tip’, remember that most are trying to get you to buy more stock so that they or those recommending it have a bigger commission cut, and ask yourself if the source of this ‘information’ is a registered adviser or if they have disclosed any personal interest in the recommendation made.
Keep a Cash Cushion and Avoid Leverage
Volatility becomes a problem when we cannot afford to wait it out; keep an emergency or cash reserve aside at all times that will allow you to meet any expenses if you unexpectedly lose your job or have an emergency. This is especially important with dependants. Money needed to pay for a house renovation or school fee should not be invested in any stock portfolio, but rather a safer instrument if it will be used within a couple of years. Do not leverage or borrow money to invest either, or use too much margin if day trading; volatility can increase your losses and send you out of a position you should have stayed in. Investors who only invest with their own ‘surplus’ money can weather a storm and come out the other side having made a killing during the mean reversion.
Review, Record and Reflect
Review your notes and the position at regular intervals (maybe every quarter) and measure facts against reasons. Is the company performing at the level needed or has its debt load changed? Are valuations now way higher or lower than when you started? Has something unforeseen taken place?
You could keep a simple journal of decisions and record what you did and why; it is a useful exercise to go back a year later and see how you have been acting. You will see patterns that may assist you; for instance, you might always want to buy at the bottom after a fall or always panic and sell when you are losing. This gives more information than any other part of the investment process and is a very useful reality check that everyone should take part in.
Final Thoughts
Volatility is the cost of admission to growth; with a few basic preparations in place, we can even hold on to the most unruly of stocks and not sweat the small stuff, let the volatility grind away our gains.
Discipline unlocks a world of opportunity, and with the opportunity comes risk; discipline can be learned today; what will you do first?
