Should you worry about the market's current volatility?

The stock market has been volatile. Should one follow the dictum: Sell in May and go away?

Indices tumbled during the week but picked up on Friday. In the midst of such volatility, investors tend to question whether or not it is the right time to get into the market or out of it. But frankly, they are asking the wrong question.

Such questions are based on the presumption that they can enter the market and exit at the right time. Let’s get this straight, this is much easier said than done. Look back at your own track record. You may be boasting about the fact that you did not invest in 2007 when the market was on a roll. But did you enter the market a couple of years before that when it was at a low? Did you buy stocks immediately after the dot com crash? In 2008, when stocks were available at dirt cheap valuations, did you buy?

That’s the double-edged sword of market timing – it’s not just about skipping the market highs; should you miss a crash, you miss riding the recovery that follows.

Not too long ago, in October 2014, volatility hit the Indian market begging an answer to the same questions raised today. The reason at that time was more global - a likely recession is Europe, compounded by slow economic growth in the U.S., fear over the spread of Ebola, and geopolitical hazards. VIX (Chicago Board Options Exchange’s index of volatility) hit its highest level since late 2011 and the India VIX Index also jumped. But we got through that phase.

Don’t forget the hit that stock markets across the globe took in 2011. Financial Times reported that global stock market capitalisation dropped 12% that year. The Indian market did not escape unscathed. The Sensex ended the year at 15,454. By April 2, 2012 it moved to 17,478 only to drop to 16,546 by May 8, 2012. Yet the annualised 3-year Sensex returns (as on May 8, 2015) are 17.88%

The point is that if you ignore market upheavals and stay the course, you end up making money.

If you want to be successful in the stock market, stick to your guns and don’t deviate from your investment plan. A successful investor is not one who accurately predicts the direction of the markets. To do so you would have to either be an astrologer with a very high success rate or God; chances are that you are neither. Stick to basics, which means you need to ignore the distractions and the desire to give way to your emotions and behave rationally.

I had started off by saying that investors are asking the wrong questions. What are the right ones?

The right questions should pertain to your portfolio. Are there any funds whose volatility is giving you heartburn? Then you could consider eventually dropping them from your portfolio. Have you reached your goals? For instance, if you were saving in an equity fund towards the downpayment of a house and you need to make the purchase soon, it would make sense to move that money out of equity now. Or, is it that you have a better alternative investment in mind? Do you want to invest in some property that is available for a song? Then you could consider offloading your stocks to finance this investment. Base your decisions on your goals and capability for risk. Not on the volatility of the market.

On a lighter note, the entire saying is "Sell in May and go away, don't come back till St Ledger Day" and its origins are not Wall Street, but London. Summer sporting events were considered major events and the St. Leger Stakes was the oldest of England’s five horse racing classics and the last to be run in the year. The rick folk who traded were distracted with the social events and volumes would plummet in the summer months, leaving share prices flat, falling or at least volatile.

The reasons for volatility now are very different, though an abbreviated version of the phrase is still thrown around.

Source:http://www.morningstar.in/posts/33006/should-you-worry-about-the-markets-current-volatility.aspx