Here’s a different spin on volatility — it’s not all bad, after all what goes down also goes up
Volatility refers to the daily ups and downs of investment values. Much maligned by investors and the media when prices plummet, volatility is welcomed when investment values head upward. Yet, when was the last time you heard anyone use the word "volatile" to describe prices going up?
How volatility differs from a roller coaster
Volatility is often equated with riding a roller coaster, but there’s one key difference: When a roller coaster ride ends, you’re exactly where you started.
That’s not necessarily the case with volatility. World stock market values have tended to move upwards over the long term despite steep periodic declines, such as the one that has occurred recently. From a long-term perspective, the declines don’t look nearly as steep as they probably have felt.
Living with volatility’s downside
Learn 4 strategies for living with financial market fluctuations.
- Focus on the long term
- Invest regularly
- Diversify your investments
- Carry out thorough research and seek financial advice where appropriate
1) Focus on the long term. One key to living with volatility is focusing on long-term results rather than the daily bumps along the way.
This can be especially difficult during prolonged market declines fed by daily injections of bad news. Investors living through the aftermath of the technology bubble that burst in 2000 were acutely aware of how challenging it can be to stay focused on the long term.
If you develop the ability to keep your focus on the long term, you’ll have mastered the primary approach to living with volatility’s downside
2) Invest regularly. Also called pound-cost averaging, regular investments are another strategy for living with volatility’s downside and taking advantage of its upside.
You don’t need to worry about the best time to invest when you put away the same amount every month, but like most investing strategies, it doesn’t guarantee a profit or prevent losses.
This strategy can help reduce anxiety about portfolio declines. However, by focusing attention on the bright side — when the market is down, you’re buying at a lower price — but it also requires you to continue investing despite fluctuating prices. Before starting a pound-cost averaging plan, consider your ability to continuing buying through prolonged market and economic slumps.
3) Diversify your investments. No one asset category does well all the time, so it can be a good idea to put your eggs in a variety of baskets. If some of your investments are down, others may be up.
One area of the market can shoe positive growth for several years, like the technology sector in the second half of the 1990s. During those years, owners of diversified portfolios may not have had much to say when friends bragged about their outsized returns. But the technology stock free fall that started in 2000 underscored the value of diversification as a strategy for living with volatility’s downs.
4) Carryout thorough Research. Our last strategy for putting volatility in perspective may be the most important. Focus on your financial goals, your time frame and your comfort with volatility and use thorough research to select investment vehicles to help you achieve your aims. If in any doubt seek professional advice.
Common Investor Mistakes to Avoid
- Hold cash until after a recovery missing the upturn in markets
- Sell when markets are low and realise losses.
- Follow the crowd and buy when the markets are high missing out on potential gains.
- Attempt to time the market and getting it wrong.
Following on from our last article it is Time and NOT Timing that investors need to bear this in mind and as such it is always a good time to invest for the long term. Even more so now when markets have fallen as a result of irrational panic selling resulting in undervaluations, a perfect environment to provide investor and fund managers alike with good profit making opportunities.
It is worth remembering that articles like this one can tell you what volatility is and provide some time-tested strategies for coping with and taking advantage of falling investment values, but they can’t meet your personal needs as effectively as a financial advisor.
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