Much of the volatility in the stock market these days is related to the current Russia/Ukraine conflict. The markets respond to global conditions, however, and it is usually not wise to attribute fluctuations to one single cause. In addition to the war in Ukraine, the Fed’s decision to raise interest rates continues to suppress markets. The Fed is acting to stabilize the economy and address persistent inflation concerns, but the effects include hesitancy among short-term investors as we approach spring.
The VIX, known as the “fear index” and officially called the Chicago Board Options Exchange (CBOE) Volatility Index, is the most widely known measure of in the stock market. This index measures the degree of volatility that professional investors predict the S&P 500 will undergo during the next 30 days. The CBOE VIX is commonly said to be an indicator of “implied volatility”.
For the VIX, the S&P 500 is considered a representative sample of the market as a whole. A higher VIX correlates to greater market volatility. That means:
- – When markets are more volatile, stable assets like money markets or bonds may fare best. The market is likely to be bearish (expect unexpected price swings, which are often downward, which can be a great opportunity for investors to ).
- -When the VIX is below 30 and markets are expected to be stable, it is a reasonable time to bet on more risky but potentially high-growth stocks. The market is likely to be bullish (expect more stability and upward-trending values).
It is important to embrace market volatility within reason. It’s part of being in the market! You can plan on seeing volatility of about 15% from average returns during a given year.
For short-term professional investors, volatility creates much uncertainty and potentially . When volatility is high, short term investors may decide that it is a good time to sell some assets from high-risk stocks. However, volatility makes it very difficult to time the market. The market tends to have short burst of sharp downward movements followed by subtle upward movements till the market eventually bounces back. This causes high risk for short term investments and active trading, rather than long term who should not be affected by price fluctuations.
For most long-term investors, if you’ve invested well and are comfortably diversified, your accounts can weather standard market fluctuations. If your investments face a market correction and go down in value, it’s important to remember that the value is likely to rise again with time. Historically, bear markets are often shorter-lived than bull markets, and that means stock values tend to increase over longer periods. Invest regularly. Focus on dollar cost averaging. Wait out any downturns.
Your dates of purchase and sale play a major role. Consider the last two years in U.S. market conditions (counting from spring 2022) and the bear market that came into play in 2020. If an investor bought into a stock in December of 2019 and sold after the bear market kicked in — or even just as prices started to fall — they would have been likely to sell at a loss.
By December 21, 2021, however, that same stock is likely to have substantially gained in value given current market conditions, even considering the recent correction sparked by the war in Ukraine. As an investor, you could have lost 40% of your money investing in the market for a month or received a satisfactory gain by investing for a year. This is why most financial advisors consider to a retirement portfolio and to meet their long-term financial objectives.
Investment decisions based on emotions are dangerous. Invest with a plan, and stay the course. Remember, the market’s inherent volatility gives us a chance to invest at discounted rates/price points from time to time. Historically, the market always delivers long-term gains. The US market has fallen at least 10% in 28 of the last 50 calendar years, but it has returned 11% overall during the same 50-year period (). The market tends to rebound.
The war between Ukraine and Russia has undoubtedly increased volatility. That does not mean this is a time to divest — switching to cash mid-correction can result in losses, while holding on to solid long-term assets is likely to lead to future gains. By selling, you’ll also lose out on the compounding interest that can lead to stable, long-term results. Following your long-term plan is more likely to help you achieve your financial goals. Furthermore, it can be more efficient to invest with small amounts of cash on a regular basis, rather than a lump sump of money as Dollar Cost Averaging, even in market downturns, can reduce the average cost of your investments.
Instead of considering this a time to sell, you can begin to invest in a long-term investment plan while taking advantage of the current discounted rate with . SmartWealth provides diversified ETF-based investment plans of stocks, bonds, real estate, and other assets that can help you work towards your financial goals and help mitigate any market risks and volatility.
Existing investors can also continue to benefit from SmartWealth’s expert advice and tailored investment plans, by focusing on their long term financial goals, making regular deposits to their account, and reviewing their risk tolerance to ensure it still aligns with their needs and preferences.