The stock market is an ever-changing landscape. The constancy of change is the only thing that remains constant. Market indexes experience daily shifts, and these fluctuations are an inherent part of the investment ecosystem. There are periods of calm and periods of tumult, which market experts term as "volatility."
Volatility doesn't necessarily signify danger; it could be one of the key elements to investment success.
Market volatility signifies the frequency and intensity of price movements in either direction. If the price oscillations are larger and more frequent, the market is deemed more volatile.
According to Nicole Gopoian Wirick, a certified financial planner (CFP) and founder of Prosperity Wealth Strategies, volatility is a normal part of investing. If markets only moved upwards, investing wouldn't be as challenging as it is, and we'd all be wealthy.
The measurement of market volatility is performed by calculating the standard deviation of price changes over a specific duration. This statistical concept helps us understand how much a value deviates from the average.
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The rule of thumb is, the higher the standard deviation, the more the portfolio will fluctuate from the average. Standard deviations are crucial as they indicate how much a value can change and give a framework for the probability of it happening.
To comprehend standard deviations in the context of market volatility, traders calculate standard deviations of market values based on end-of-day trading values, intraday volatility, or projected future changes in values.
The VIX, also known as the "fear index," is a popular measure of stock market volatility. It assesses traders' expectations of stock price movements over the next 30 days based on S&P 500 options trading.
The VIX tends to be higher when the options are more expensive. This is linked to the rising value of puts (a type of option), which becomes more desirable as the likelihood of the S&P 500 falling increases.
Historically, normal levels of VIX are in the low 20s, which indicates that the S&P 500 will deviate from its average growth rate by no more than 20% most of the time. However, the VIX has been lower over the last decade.
Market volatility is a frequent occurrence. As an investor, you should expect about 15% volatility from average returns during a year. Most of the time, the stock market remains relatively calm, interspersed with brief periods of above-average market volatility.
Generally, upward-trending markets are associated with low volatility, while downward-trending markets come with unpredictable price swings.
Market volatility can induce different reactions from investors. However, panic selling after a significant market drop is highly discouraged. Here are some strategies to handle market volatility:
Investing is about the long run. A well-diversified portfolio is designed to weather periods of volatility. If your funds are needed in the short term, they shouldn't be in the market. However, for long-term goals, volatility is part of the journey.
Periods of volatility could be viewed as opportunities to purchase stocks at discounted prices.
Having an emergency fund equivalent to three to six months of living expenses is vital for investors. It prevents the need to liquidate investments in a down market.
Market volatility can cause sharp changes in investment values, and your asset allocation may drift from your desired divisions. Rebalance your portfolio to align it with your investment goals and risk tolerance level.
Market volatility is an inherent part of investing. It might be unnerving to see losses on paper, but remember that the companies you invest in are resilient and can weather a crisis. History has proven that patient and disciplined investors have done well, with the U.S. stock market providing average annual returns of about 10% long-term.
GENERAL RISK WARNING!
NOTE: This article is not investment advice for anyone because online trading could be a high risk for all who have a lack of knowledge & experience. 86% of traders lose money in financial markets. we are not your financial advisors who guarantee your profit at all.
