What is market volatility?
Typically, prices on the major stock markets go up or down a small amount every day. But sometimes, prices rise or fall dramatically—and you’ll often see this referred to as market volatility. It’s normal to feel nervous about market volatility and wonder what you should do about it. We can help you understand what it is and what you can do.
During periods of uncertainty, such as a pandemic or a global military action, the markets react to the news headlines, causing volatility. When the future is unclear, markets and investors get nervous. As an investor, you may be unsure what—if any—action you should take.
How to deal with market volatility
One thing you can do is reframe market volatility as an opportunity. Unlike stable assets such as cash or guaranteed investments, stocks (and other investments) are always changing in value. You’ve heard “buy low, sell high”? That’s because it’s normal for prices to change.
Even though it can be stressful to watch the value of your investments go down, you don’t experience an actual loss (or gain) until you sell an investment. Here are a few things you can do to handle market volatility:
Reframe it: volatility = opportunity
Imagine you need to buy a new refrigerator and the model you want just went on sale. Would you wait until the price goes back up or take advantage of the temporary price drop? Few of us would be upset about the price drop on a major appliance purchase. It's helpful to look at short-term volatility as a long-awaited opportunity to buy something we want at a better price.
Review your financial goals
If you have a long-term financial goal like retirement, today's market volatility may not have much of an overall effect. Even if you’re close to retirement, today's market fluctuations are likely to have less of an overall effect. That's because it's common today for retirees to maintain a diversified portfolio of stocks and bonds for many decades. But that doesn’t mean you shouldn’t review your investment strategy and your goals. If you have a retirement account, take a look at your investments. You might want also to talk with a financial advisor if you’re unsure about your strategy.
Keep calm and save on …
If you contribute regularly to your retirement savings plan, then you're benefitting from a strategy called dollar cost averaging. Contributions from your pay go toward buying fund units. When the unit prices drop due to market volatility, your money goes further because you get more units for the same amount of money. This is a benefit to you because it lowers the average price of your investments over the long term. Remember: Whether market prices rise or fall, it's not a gain or loss until you sell.
Still unsure how to navigate volatility? A financial advisor can help
One of the many benefits of working with a trusted financial advisor is having someone in your corner during periods of market volatility. An advisor's guidance can give you greater peace-of-mind to stay focused on your long-term goals without getting distracted by short-term volatility.
The commentary in this publication is for general information only and should not be considered legal, financial, or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation.