Every time markets fall sharply, I hear some version of the same sentence: &ldquo;The market has become very risky.&rdquo;
I have always found that interesting because a lot of the risk investors discover during a falling market was actually added when the market was going up.
Think about how this happens.
You buy a stock, and it does well. You add some more. It keeps going up, so the position becomes bigger. Perhaps you buy another company in the same sector because it is also doing well. Cash starts looking like wasted money. A return of 20&#37 begins to feel normal.
Nothing feels particularly risky because everything is working.
Then the market falls 15&ndash;20&#37, and suddenly the portfolio looks very different. The large position now feels too large. The two companies you thought were different start falling together. The money you invested in equity but might need next year, starts worrying you.
We usually blame the volatility. But the volatility did not put those risks into the portfolio. It simply made them easier to see.
The safest market can sometimes make us take the most risk. This is one of the strange things about investing. When markets are volatile, investors become careful. They question valuations.
They keep some cash. They think twice before buying.
After two or three good years, the opposite can happen.
You have made money, so you increase your position size. A few successful decisions start to feel like evidence that you understand the market better. Something you would have considered risky three years ago suddenly feels reasonable.
Sometimes the biggest risk in your portfolio is the confidence you built during the last bull market.
There is another part of risk that I think we underestimate: time.
Ask someone during a good market whether they can tolerate a 25&#37 fall, and many will say yes. But imagine your Rs 10 lakh becomes Rs 7.5 lakh. Now imagine it stays between Rs 7 lakh and Rs 8 lakh for the next eighteen months while people around you seem to be making money elsewhere.
Can you still leave it alone?
For many investors, the difficult part is not how far the portfolio falls. It is how long they have to live with that fall. So perhaps risk appetite should not only be measured by asking, &ldquo;How much can I lose?&rdquo;
A better question may be: &ldquo;How long can I remain uncomfortable without abandoning the plan?&rdquo;
I have spent enough years in markets to know that volatility will always feel unpleasant. That is not necessarily a problem. The useful part of a volatile market is what it shows you about the decisions you made when everything felt comfortable. So when markets become volatile, instead of only asking how much further they can fall, I would ask something more personal:
What am I discovering about my portfolio now that rising prices are no longer making every decision look right?
The answer may tell you far more about your actual risk than the market fall itself.
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How Should Investors Think About Risk When Markets Are Volatile?

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How Should Investors Think About Risk When Markets Are Volatile?

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