If you’re relatively new to investing, you may have heard of market volatility but not experienced it firsthand. After all, the markets have been relatively calm — and incredibly good (2022 notwithstanding) — for many years.
What Does Market Volatility Mean?
Market volatility refers to the degree of variation of trading prices for a given market index or security within a certain period. In simpler terms, it measures the extent to which the prices of financial instruments such as stocks, bonds, or commodities fluctuate. A highly volatile market is characterized by more significant and frequent price movements, while a low-volatility market experiences smaller and less frequent price swings.
What to Do in a Volatile Market?
While the market has recently had its fair share of volatility and downturns, it’s essential not to be overly concerned about market swings. While the market’s past performance is never a 100% guarantee of future performance, historically, the stock market rebound is always coming. But it’s never fun to see losses, even if they are “on paper.”
Market volatility will never go away. But history shows that over time, market growth has prevailed. According to a study from Fidelity Investments, investors who chose to sell their stocks during the Great Recession in 2008 locked in market losses of nearly $80,000 compared to those who chose to ride out the storm and leave their accounts unchanged.
Tips for Today’s Market
Here are some tips to consider in our current market conditions:
- Review your risk tolerance and timing. Your risk tolerance measures how comfortable you are losing money if the market dips. At the same time, you need to consider how long you have until retirement. Can you afford to take more risk to earn rewards later, or do you need to tighten up your investment portfolio? Of course, no one can predict the market, so you can’t time it perfectly. However, you can speak with a financial advisor to help plan your investments based on historical patterns and financial goals.
- Rebalance your portfolio. Following a downturn, the market can take years to rebound. So, it may be time to consider rebalancing your portfolio, which simply means shifting your investment holdings to different asset classes, like stocks and bonds. You may want to tweak some of your investments to ensure your holdings still align with your timing and risk tolerance.
- Maintain a cash reserve. Having readily available cash allows you to capitalize on buying opportunities with low asset prices. It also provides flexibility to meet financial obligations without liquidating investments at unfavorable prices during market downturns.
- Maintain a long-term perspective. In times of market volatility, it’s crucial to maintain a long-term perspective. Short-term fluctuations are a natural part of the market cycle, and knee-jerk reactions to market movements can lead to poor decision-making. You can ride out short-term market turbulence by focusing on long-term goals and staying disciplined in your investment approach.
Dealing with a volatile market requires preparation, discipline, and adaptability. Remember that volatility is an inherent aspect of investing, and with the right strategies in place, it can be an opportunity for growth rather than a cause for concern.
If you’d like to take a closer look at your investment portfolio or create a financial plan for your future, don’t hesitate to contact a Quail Creek Bank Financial Advisor. Our experts will review your financial circumstances and work with you to develop (or fine-tune) a plan for your successful financial future.
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