Market volatility can unsettle even the most experienced investors, but it also offers unique opportunities to those who know how to navigate it effectively.
Before we look at ways to manage it, let’s refresh ourselves on a some of the background details.
Firstly, what is market volatility?
Volatility is the frequency and size of price movements. The bigger and more frequent, the more volatile the market is said to be.
What affects it?
Market volatility is affected by a broad range of factors that can be economic (relating to inflation figures, employment statistics, GDP growth rates), geopolitical (elections, international conflict etc) psychological (investor sentiment) and structural (trading rules, regulation etc).
Market volatility never looks as bad when viewed from a distance
Volatility has started to creep up again in 2024, but it’s always worth taking a step back and look at the bigger picture. To do this, let’s look at what’s sometimes referred to as ‘the fear index’, the CBOE Volatility Index, or VIX. Based on future options of the S&P 500, the VIX tries to gauge when investors are nervous about future volatility.
Over the last few years, there have indeed been occasions when it has shot up – notably during the pandemic. But these spikes are only for short periods; volatility isn’t a permanent state.
Source: CBOE Volatility Index since 2020. Over 30 usually signals increased uncertainty, while under 20 is normally a calmer period in the markets. Past performance is not a guarantee of future returns.
Now let’s take a look at ways to manage volatility
Diversification
We always advocate not putting all your eggs in one basket. Diversification is about spreading your investments across different asset classes (stocks, bonds, cash, etc.), sectors, and geographical regions. That way you can reduce the impact of a downturn in any single area on your overall portfolio. Diversification doesn’t guarantee profits or protect against loss, but it can stabilise your returns.
Rebalance often
Rebalancing is the process of realigning the weightings of a portfolio of assets by periodically buying or selling assets to maintain an original or desired level of asset allocation or risk. This can be particularly important in volatile markets where asset values can fluctuate widely, causing some investments to weigh too heavily or too lightly in your portfolio. We rebalance your portfolios for you to help maintain your risk tolerance and investment strategy alignment.
Avoid checking your investments
Constant monitoring of your investment portfolio can lead to impulsive decisions and unnecessary stress, especially during periods of high market volatility. Frequent checks often heighten emotional responses to short-term market dips and peaks, which can derail long-term investment strategies. It's important to remember that markets naturally fluctuate, and daily movements are generally less relevant to long-term investment goals.
Stay invested to capture key market days
Attempting to ‘time’ the stock market — identifying the exact moments to buy low and sell high — is an exceptionally challenging task, even for seasoned investors. Recent periods of sharp market fluctuations have only amplified this difficulty. Notably, the most significant gains in the stock market tend to occur on just a few critical days. Missing these key opportunities can have long-lasting repercussions on your investment returns.
Have a long-term view
Short-term market fluctuations can be alarming, but having a long-term investment strategy can keep you grounded. Focus on your long-term investment objectives and avoid making impulsive decisions based on short-term market movements. Long-term investing has historically proven to be a more successful approach because it allows you to ride out the volatility and benefit from the growth of the markets over time.
Remember investing beats cash
In times of inflation, keeping large sums of money in cash or traditional savings accounts can lead to a decrease in purchasing power. This is because the interest rates on these accounts often fail to keep up with the rate of inflation, effectively diminishing the value of your money over time. Conversely, investing in the financial markets provides a significant advantage. Although investing carries its own risks, historically, it offers returns that exceed inflation, preserving — and potentially increasing — your wealth's real value.
Stay calm and patient
Finally, one of the most important steps in managing market volatility is maintaining your composure. Emotional investing leads to poor decision making. When the market is turbulent, remind yourself of your investment strategy and long-term goals. Patience is essential; overreacting to short-term market movements often results in missed opportunities when the market rebounds.
While market volatility can be stressful, taking proactive steps to manage your investments can mitigate risks and enhance potential returns. By diversifying your portfolio, sticking to a long-term investment plan, and maintaining a calm approach, you can navigate through turbulent times more effectively. Remember, volatility isn’t a permanent state – and it can be an opportunity for those who are prepared.
