How to manage risk in a volatile stock market

Varun Khanna, 47, has amassed a mix of assets for his family, including a house, jewellery and investments. He has been investing in equities for his retirement, but the recent market surge and stretched valuations are making him question his strategy. With retirement 13 years away, should he stay invested in equities despite the volatility or shift to safer assets like debt or real estate?

A natural reaction to the fear of market correction is to reduce or eliminate equity exposure, thinking it will prevent further losses. Does this make sense in the long run? Long-term investors like Khanna must remain calm during periods of volatility. Making drastic changes to his portfolio during these times could harm his wealth. It’s challenging to time the market, deciding when to exit and re-enter.

Khanna has invested with a clear horizon and plan in mind. He understands the risks of equity, but also its potential long-term returns. Equities provide him the best chance of achieving his retirement goals. If he exits now in panic, he risks three things: missing out on buying at lower prices, missing the market rebound, and settling for lower returns elsewhere.


A better option, if he’s feeling uncertain, is to pause further equity investments. For example, if he had 60% of his portfolio in equity, market decline would naturally reduce this proportion. By diverting fresh investments to debt, his portfolio will automatically rebalance, bringing equity exposure below 60%. The downside is missing the opportunity to buy in a falling market, but that’s a tough call for most investors to make. Staying invested is difficult when the market is falling, but it often pays off in the long run.

Equity markets are inherently volatile. This volatility will serve as a reminder for Khanna to regularly review his investments and ensure his portfolio remains diversified. It’s easy to react emotionally, but by sticking to his plan, he can turn market fluctuations to his advantage.

Content courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.