What is Volatility?

What is Volatility?

The value of your investment can change over time, sometimes unexpectedly. The stock market is a good example of this as a stock’s price can experience daily fluctuations. Stock prices can increase or decrease by small or large amounts, and the range of these changes is often described using the term volatility.

What Is Volatility?

Volatility in investing refers to up or down movements in the price of a stock, bond, or other security over time. The more volatile a security is, the greater the potential it has to lose or gain value in the short term. Volatility is unavoidable in the market, and as a long-term investor you’ll experience it from time to time.

Because people tend to experience the discomfort of losses more than the joy of gains, a volatile stock that moves up as often as it does down may still seem like an unnecessarily risky proposition. However, what seasoned investors know that the average person may not is that market volatility actually provides numerous money-making opportunities for the patient investor.

Although volatility can present investment risk, when correctly harnessed, it can also generate solid returns for investors. Even when markets fluctuate, crash, or surge, there can be an opportunity as you would be buying at discounted prices.

What causes Volatility?

  1. Political and economic developments
  2. Industry and sector performance
  3. Changes in economic policies

Regional and national economic factors, such as tax and interest rate policies, can significantly contribute to the directional change of the market and greatly influence volatility.

Changes in inflation trends, plus industry and sector factors, can also influence the long-term stock market trends and volatility. For example, a major weather event in a key oil-producing country can trigger increased oil prices, which in turn spikes the price of oil-related stocks.

4 ways to deal with market volatility

1. Ignore short-term volatility and stay the course

It’s very difficult to try to time the market to know when to get out and get back in again. You may consider holding on to your investments during market volatility depending on your investment plan and time horizon.

By investing in a diversified portfolio, you can mitigate the risks associated with market volatility, as generally all investments don’t go up and down at the same time or by the same amount.

2. Spread out your risk by making regular investments

Dollar-cost averaging is one way to manage the impact of volatility. By investing a set amount regularly, for example monthly, you can average out your investment costs. You also avoid the risk of investing a lump-sum in the market at a time that may later turn out to be the peak.

3. Buy good investments at a good price

Market volatility can be an opportunity to invest at a discount in good companies that you believe will perform well over time. It’s also important that your time horizon and investment strategy support buying during volatile periods and waiting for growth down the road.

4. Get advice to help you deal with volatility

If market turmoil is keeping you up at night, consider consulting a qualified advisor who can help you develop investment strategies to weather the ups and downs more comfortably.

Conclusion

It’s natural to be nervous when markets are volatile, and you may want to start selling out of fear. Volatility is not always a bad thing, as market corrections can be seen as an advantage to invest at a lower price or discount. Choosing to invest in a well-diversified portfolio can help reduce the impact of short-term spikes in the market, while offering the potential for smoother returns over time.

Share on facebook
Share on twitter
Share on linkedin
Share on email
Share on whatsapp

Ready to invest for your future?