Put simply, volatility is the measure of how quickly the markets move and how much this causes the value of your investments to jump around.
When we see the kinds of change that have happened across the world in the last couple of years, it’s not surprising that markets have indeed jumped around. Values have risen and fallen sharply in short periods of time.
No matter what your experience of investing, volatility can be daunting – yet it’s a natural part of investing.
Here we explore market volatility and share some principles that can help you handle these periods of uncertainty.
Market movements are driven by what experts across the world think will happen next. These analysts estimate the impact on markets, and we see market fluctuations resulting from these estimates and associated decisions.
Increased volatility often happens during periods of economic stress, like a recession. It can be caused by economic or policy factors, including interest rate changes and inflation.
Political instability can also cause market volatility – as can global events, like a pandemic or a war.
As an investor, you can’t avoid market volatility. But keeping these 3 principles in mind could make the ride feel less bumpy:
Short-term volatility doesn't always affect the long-term growth of your investment. So, it may help to focus on those long-term goals during volatile periods.
This chart shows that over the past 20 years, markets have recovered in the longer term – even from the biggest turmoil. Riding these short-term fluctuations could bring positive returns when you look further ahead. Recovery may be quick but can sometimes take longer, so you should really be looking to keep your money invested for a longer time-frame.
Returns from $100 invested in global stocks over the last 2 decades
Always remember that investing comes with risk so you may not get back what you put in. And past performance isn’t a reliable indicator of future performance.
When markets get rocky, it’s tempting to sell to avoid further losses. But it can help to think of any falls in value as ‘paper losses’. The financial loss only takes effect if you sell your investments.
That’s why we recommend you keep an emergency fund of 3 to 6 months of living costs. That way you can handle any unexpected costs without having to sell your investments during a downturn.
If you can afford to stay invested, you’ll give your investments more time to potentially recover and grow.
Not all types of investments are affected the same during periods of volatility.
By combining different types of investments, you could potentially lower your overall risk of loss. That’s because a lower return in one type of asset, like equities, may typically be compensated by a gain in another type, such as bonds. This is called diversification.
Investing and volatility will always go hand in hand. But keeping these principles in mind could help to lessen the impact if and when the markets drop.
