How volatility affects your investments
Understanding volatility
The value of your investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition can change over time, sometimes unexpectedly. The stock marketStock market The collection of markets and exchanges where stocks, bonds and other securities are issued or traded.+ read full definition is a good example of this as a stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition’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 volatilityVolatility The rate at which the price of a security increases or decreases for a given set of returns. A stock price that changes quickly and by a lot is more volatile. Volatility can be measured using standard deviation and beta.+ read full definition.
Volatility measures the degree of change in the price of an investment over a period of time. For example, if you have a stock with a price that stays fairly consistent, it’s considered to have low volatility. A stock with a price that changes quickly and regularly is more volatile. High volatility generally makes an investment riskier and it also means a greater potential for gains, or losses.
When determining the volatility of a particular investment, it’s not enough to just look at its price change from one day to the next. You should also look at the largest monthly or quarterly loss it experienced, as well as the largest gain.
How volatility affects your returns
Your investments could experience periods of volatility. Some investments, like stocks, can move dramatically from one day to the next. As a result, your investment returns can vary and be positive or negative depending on when you buy and sell.
While volatility in certain markets is inevitable and not all aspects of volatility are negative, it’s important to be prepared. A well-defined investment plan tailored to your financial goals and financial situation can help you be ready for the normal ups and downs of the market, and to take advantage of opportunities as they arise.
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 horizonTime horizon The length of time that you plan to hold an investment before you sell it. This may be a brief period of time or span as long as decades, depending on your financial goals.+ read full definition.
By investing in a diversified portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and mutual funds.+ read full definition 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 averagingDollar-cost averaging A strategy where you try to reduce the cost of buying securities by spreading your purchases out over time. You buy a set amount of a security, such as a mutual fund, at regular intervals. In the end, you average out your cost per unit.+ read full definition 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 investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition at a discountDiscount When something sells for less than its normal price.+ read full definition in good companies that you believe will perform well over time. Before you invest though, do your due diligence and be sure you understand a company’s true upside potential. 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.
KEY POINT
It’s natural to be nervous when markets are volatile and you may want to start selling out of fear. Have an investment plan with a long-term view that you trust to work well during all types of markets conditions — and be sure to follow it.