Stock market volatility is inevitable and can be challenging at times, but with the right strategies and understanding of volatility, you can navigate through it. Recently we’ve experienced heightened volatility in the equity markets. You may have read about it, heard it on the news, or were told by a friend or family member. As advisors, we help prepare our clients for market volatility and help them put a plan in place to navigate through the peaks and valleys of the markets. Throughout this article, I’ll share with you a 30,000-foot view of what market volatility is, and strategies you can utilize to help you navigate through it.
What is volatility? Simply put, volatility is how quickly prices fluctuate over a period of time. In finance, volatility is often used to describe the stock market and other investments. Periods of higher volatility mean that prices are fluctuating at a quicker speed. This could mean stock prices are increasing quickly, or it could be that prices are decreasing quickly. At times, it can be a combination of the two. Investments that have higher volatility often carry a higher risk with them.
There are a number of factors that can cause volatility. A few of them are news and events, emotions, and supply and demand. Recently, the various news and policies surrounding tariffs have led to increased volatility in the markets. The markets tend to like certainty, and there has been a lot of uncertainty lately surrounding global trade. Additionally, emotions can play a factor in volatility. When investors are scared or worried about the future of the economy, it tends to have a negative effect on the markets. Conversely, when investors are confident and optimistic about the future of the economy, it tends to have a positive effect on the markets. Finally, supply and demand drive the price of stocks. With today’s current investing environment, there has been an increase of investors in the market. This has led to faster changes in supply and demand trends, which in turn increases the speed at which investment prices fluctuate.
It’s important to be aware that all investments carry risk, and there’s a risk-reward tradeoff. The more risk you take usually means the higher potential of return, but it also means there’s a higher risk of loss. While there is no perfect investment strategy, I want to share with you with a few strategies that are commonly utilized to help navigate market volatility.
Diversify Your Portfolio – There’s an old saying, “Don’t put all your eggs in one basket,” and the same is true for your investments. To help reduce volatility when investing, you can spread your investments across a variety of different types of assets, sectors, and geographic locations. By investing in a variety of investments you are spreading out your eggs in a variety of different baskets.
Maintain a Long-Term Perspective – We follow a few golden rules when advising our clients on how to invest money. One of those rules is, “not to put short-term money in long-term investments.” We believe that is speculating. Rather, we work with our clients to determine the purpose of their money, the timeline for it, and their comfortability with risk. By separating out short-term money from long-term money, it helps to provide clarity on how much risk you can afford to take when investing the money. For short-term money, it should not have much to any risk. We believe it is more important to have a return of your short-term money rather than the return on your short-term money. For long-term money, you want to try to grow it over time, which will require you to take on some risk. Although fluctuations with long-term investments can feel unsettling at times, it’s important to maintain a long-term outlook and not let short-term emotions effect long-term investments.
Dollar Cost Average – This strategy refers to investing a fixed amount of money at regular intervals, regardless of market conditions. This can be done on a weekly, monthly, quarterly, or annual basis. What is crucial with this strategy is the consistent investments over time. Using this strategy can help reduce the impact of volatility over time by purchasing more of an investment when the price is low and less of an investment when the price is high. This can help investors avoid trying to time the market and rather focus on how much time they allow for their investments to stay in the market.
Keep an Emergency Fund – While it may seem simple, keeping an emergency fund to cover unexpected expenses can help you avoid selling your investments during a downturn in the market. Also, your emergency fund should not be invested in the market. It is short-term money and should be kept safe and liquid.
While market volatility can be uncomfortable, knowing what it is, what influences it, and using strategies to reduce its impact can help you be better equipped to handle the ups and downs of different market environments.
-by Jacob Young, AAMS®
Financial Advisor, RJFS
313 East 10th Ave.
Bowling Green, KY 42101
Phone: 270-846-2656
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Ben Smith Life Compass Financial is not a registered broker/dealer and is independent of Raymond James Financial Services.
Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jacob Young and not necessarily those of Raymond James.
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