How to Invest Like a Pro During Volatile Markets 

Hello everyone, Rahul Shah here, trying to make investing accessible and profitable for the average investor.

After a stellar 2023, I was expecting smallcaps and penny stocks to have a subdued 2024 and perhaps even witness a small correction.

Little did I know that the correction will come this fast and a pretty steep one at that.

The BSE Small Cap index touched a high of 46,821 a little over a month ago.

Well, it has taken a U-turn since then and has gone in the other direction in a big way.

As I record this, the index is down around 10% from its highs and is threatening to go even lower.

To be honest, the writing has been on the wall for quite some time now.

Things finally came to a head when the regulatory body came out with the notification to instruct mutual funds to go slow on midcaps and smallcaps and even outline a plan to prevent a huge market meltdown.

That a lot of the prominent investors and fund managers had been talking about the froth building up in this segment, was another warning sign.

Looks like the current correction is the aftermath of these events. Of course, the fact that a lot of the stocks had become overvalued plus the huge run up in bad quality speculative counters, also added fuel to the fire.

Now, I can hear you all saying that in hindsight, everything looks crystal clear.

However, if I was so sure of a correction, why didn't I warn readers in advance?

Better still, why didn't I recommend an exit from a lot of stocks where they were sitting on hefty profits?

Well, my answer would be that while I may have failed when it came to executing the tactics, our long-term strategy is still spot on. Hence, we are in a better position than most other investors.

Strategy vs tactics? Allow me to explain.

I am going to use a cricket analogy here.

In the game of cricket, batting is all about keeping your head still. Since head is the heaviest part of the body, your body will move in the direction of the head.

Hence, it's very important to keep your head still and take it in the direction of the ball while executing a shot.

This should be your strategy while batting and should not be compromised with. If your head is misaligned or wobbles a bit, there is a strong chance you may lose your wicket.

So, a still head is a strategy. Your initial trigger movement can however be called your tactic.

Depending on the pitch or your comfort level, you either have a front foot trigger movement or a back foot one. Each has its advantages and disadvantages and can make you a strong front foot or a strong back foot player.

So, while your strategy of keeping your head still may help you survive on the wicket, your tactic of having your preferred trigger movement, can help you score quick runs and increase your strike rate.

Similarly, across most of my services, I have both a strategy as well as a tactic.

Let's talk about my strategy first.

Our strategy is to keep 25% invested in stocks as well as fixed deposits at all times.

This is non-negotiable. At no point will we be in 100% stocks or 100% fixed deposits. There will be a minimum 25% allocation in each of the asset classes.

For the remaining 50%, we may deploy the tactic of either keeping it entirely in stocks or fixed deposits or even split 50:50 between the two asset classes.

Thus, when we feel that the markets are attractive and small stocks may do well over the next 12 months, we can employ the tactic of allocating the maximum 75% to stocks and the remaining 25% in fixed deposits.

Likewise, if we feel that the markets are expensive, we can take the fixed deposit allocation to as high as 75% and have only 25% in small stocks.

Therefore, like in cricket, the strategy is to keep at least 25% in each asset class is to ensure our survival during a market crash.

Allocating the remaining 50% based on the market valuations can be termed as our tactic to help us earn market beating returns over the long term.

Now, you can argue that before the current crash, we should have exited our stocks and should have been 75% in fixed deposits and only 25% in stocks.

Well, I can say the opposite too. I can say that thank god, we chose to remain 50:50 in both the asset classes and did not have as much as 75% in stocks.

If our stock allocation would have been as high as 75%, we would have been sitting on even bigger losses currently.

Therefore, I believe that there is no need to panic in view of the current decline, especially in small and mid-caps.

Our strategy of having a fixed deposit allocation has been designed for precisely such occasions.

It has not only allowed us to lose less than the broader index but also keep some cash handy to buy beaten down stocks at attractive valuations.

Whether to have 50% allocation or the minimum 25% allocation to stocks is individual skill, judgement or even luck.

However, as long as we are following the long-term strategy of having at least 25% in both asset classes, it will allow us to profit from market fluctuations like the current one and emerge stronger at the other end.

Therefore, our course of action right now is to keep a close eye on the stock market and see where it goes from here.

If you believe that you have a significant allocation to stocks and should bring it down, exiting some of the winners and investing the proceeds in a fixed deposit would be a good idea.

However, if one already has a sizable allocation to FDs i.e. to the extent of 50% or more then one may not take any further action and sit tight for the time being.

You see, this strategy of having at least 25% in stocks or fixed deposits is just one of the many strategies out there.

I like it because it is easy to implement and it allows one to take higher exposure to stocks when markets are low and lower exposure when markets are high and this is the right thing to do from a long term perspective.

Hence, in conclusion, we don't believe in doing damage control at the last moment.

We have a proven strategy to take care of the ups and downs in the universe of small stocks and all one needs to do is be disciplined and patient.

This is exactly what we are doing right now.

That brings me to the end of this video. I will see you again next time. Happy investing.