One should always be prepared for market fluctuation– this fluctuation refers to market volatility. Let’s learn more about what exactly this is and how to stay on course when it occurs.
What is Market Volatility?
Market volatility is the frequency and magnitude of price movements, either up or down. The bigger and more frequent the price swings, the more volatile the market is said to be.
To determine said volatility, the standard deviation of price changes over a period of time is measured.
Why should you care?
Many people tend to react to volatile market drops by panic selling. However, this deviates from what professionals suggest doing in such times. When markets are tough, you could try one of the following approaches:
Consider Market Volatility as an Opportunity
Instead of being distraught about how much you’re potentially losing, think about how much stock you can purchase while the market is in a downward state. Dollar-cost averaging allows you to buy more when the market is low and less when the market is high
Remember Your Long-Term Plan
For long-term goals you may have, volatility can be part of the journey to significant growth.
Keep a Strong Emergency Fund
Market volatility isn’t a problem unless you need to liquidate (converting assets into cash or cash equivalents by selling them on the open market) an investment since you could be forced to sell assets in a down market.
That’s why having an emergency fund equal to three to six months of living expenses is especially important for investors.
Other Methods to Navigate Market Volatility?
Determine Your Risk Tolerance
All types of investments have inherent risk(s).
If you want to pursue higher returns, you should be willing to incur some sort of risk(s).
Factors to consider when calculating your personal risk tolerance include but are not limited to: age, risk capital, net worth, time frame, and timeline.
Don’t Try to Time the Market
Study after study has shown that when investors don’t stay the course, they do damage to their portfolio through poor timing: selling at or near the bottom and/or buying after the market has already appreciated.
Invest at Regular Intervals
Utilize the dollar-cost averaging strategy to figure out when and how much to invest.
This long-term strategy can help reduce your exposure to the possible risks associated with making a single large purchase at the “wrong” time.
Diversify
You’ve probably heard this one a lot and yet we’re telling you to bear it in mind because of how crucial it is to diversify. Diversifying your portfolio simply means investing in a variety of things instead of putting your focus in one place
The goal of diversification is to build a portfolio that includes investments that react differently to the same economic factors, limiting the risks associated with “putting all your eggs in one basket.”
Allow Compounding to Work For You
Compounding is a very powerful tool if you allow it to be in layman’s terms, compounding allows one to generate money on previous money they have.
The key to obtaining success via compounding? Start saving early.
What does the future value of investments depend on?
- The dollar amount you contribute
- The rate of return you earn
- The length of time you save
- The most important factor here is time— the longer your money is invested, the more compounding can work its magic and potentially grow your asset.
Avoid Dwelling on Short-Term Performance
There’s no point in dwelling on the past. Think with a clear mind about the future and how your long-term investment will pay off. This mentality will help one move on and focus on the opportunities volatility may have for them
The bottom line?
People tend to fret and worry the minute market volatility strikes- this is normal but what people fail to recall is that said volatility is a typical part of investing in markets. Additional reassurance can be gained knowing that the companies one has invested in are always there to handle crises. But ultimately, market volatility shouldn’t move one to a different course of action- one should stay confident!
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