Most investors, especially those who are new to investing, tend to panic when the market is going through a volatile condition. They start questioning their investment plans, and many of them end up making rash decisions. However, the truth is that volatility is a part of the market. It is in the nature of markets to fluctuate over the short-term. So, what an investor needs is to understand the idea of volatile markets and have strategies to navigate them.
What is Volatility?
Volatility is the statistical measure of the propensity of a security or market to fall or rise sharply within a shorter period. The standard deviation of the returns of investment helps in measuring it. In simple words, volatility in a financial market refers to rapid and extreme price swings. When the price remains relatively stable, the security experiences low volatility. Whereas highly volatile securities typically hit new highs and new lows frequently, experience rapid increases and sudden falls, and generally move erratically.
With an increase in the volatility in the market, the risk of loss and profit potential also increases. During times like these, there is a remarkable increase in trading frequency and an equivalent decrease in the duration for which the positions are occupied. Moreover, uncertain markets also tend to be hypersensitive, as reflected in market prices.
Key factors impacting volatility
Market volatility is caused by a variety of factors. Firstly, economic factors, both national and regional, can greatly influence the market, subsequently causing volatility. For example, factors like elections and its outcomes, terrorist attacks, or any ongoing political or civil disturbance can lead to volatility.
Other factors such as the rate of inflation, trends in industries, and sectors also have a significant impact on the long-term stock market volatility. E.g. we often see that events in major oil-producing countries lead to an increase in the price of oil, causing volatility in stocks related to oil.
Natural calamities, such as floods and earthquakes or pandemics can drastically affect the market. The widespread destruction of assets due to such natural disasters causes companies to face losses. The impact of these losses are felt directly on the market, affecting its stability.
Even hyper-connectivity can impact market stability. Investors have a lot of data at their fingertips these days, which makes them easily overwhelmed by the slightest changes in the global market. Thus, the market volatility also stems from a reactionary outlook.
Taking advantage of volatile markets
You must always tread very carefully when dealing with market volatility. This is because while it is true that as volatility increases the potential for earning profits quickly also increases, you must also be mindful of the fact that higher the volatility, bigger is the risk. However, with financial discipline, it is possible to manage volatility to use it as an advantage while minimizing the associated risk. The following are some tips to help you use volatility to your advantage –
- Don’t lose hope as downturns are usually short-lived
Market downturns are highly upsetting, but there is still nothing to lose hope over it. History has shown time and again that markets can recover from such volatility and still offer good long-term returns to the investors. In fact, records suggest that the market has gone through an average 14 percent drop during each year for the last decade. In spite of that, there has been positive returns in over 80 percent of the years during this period.So, there is no reason to lose sleep due to market fluctuations. Volatility is a part and parcel of investing, and it will keep affecting the market from time to time. Stay up-to-date with the latest changes in the market with Standard Chartered Market Insights. Check out now! - Don’t try to time the market during volatility
During volatility, trying to move out of or in the market can cost you. In most cases, the decisions that investors make about buying and selling funds during this time, cost them more than what it would have if they had simply held on to the same funds.It would be great if the bad days could be predicted in advance, so that you can only go ahead during the good days. But, consistently and accurately predicting such bad and good days is not really possible. Missing out on good days in an attempt to predict the bad ones is also not a feasible idea.So, instead of trying to time the market, hold on to your funds and take up a wait-and-watch approach towards investment. For comprehensive wealth offerings from Standard Chartered click here! - Invest regularly to avoid short-term downturns
Short-term volatility will not affect you that much, if you are someone who invests regularly over months, years, or even decades. Instead of trying to plan the buying and selling of funds based on the present market conditions, take a more disciplined approach of making regular investments. It’s easier to avoid market fluctuations with monthly or weekly investments than by trying to time the market.Investing during market downturns does not guarantee gains or promise you that there will be no losses. But, the falling prices might benefit you in the long run. The investment prices fall when the market falls, and you can invest more using the regular contributions you have made so far.The key is not to give up on investing completely solely because the market isn’t seeing its best days.
Consider Systematic Investment Plans (SIPs)
Systematic Investment Plans (SIPs) let you invest a fixed amount every month in the mutual fund scheme that you choose. Though SIPs are mostly paid on a monthly basis, there are also quarterly or weekly payment options available. Market volatility can actually be in your favour if you invest in mutual funds through SIPs.
SIPs come with the benefits of rupee cost averaging. In simple words, you will average out the cost of the purchase by investing a fixed amount in the fund regularly. So, when the market goes high, you have lesser number of units, and you have more units when the market is low.
If you have invested in a Systematic Investment Plan that is aligned to your objectives, you don’t have much to worry about. Near term volatility should not get you worried when investment goals of the fund is in sync with your objectives. Systematic Investment Plans enable you to create wealth for the long term, regardless of market swings. Apply now!
The bottom line
It’s hard not to focus on the turbulence in a volatile market. Investors usually start wondering if they should do something now or how the market will look like the next day. But, instead of worrying about all of these, a sounder plan is to pay attention towards creating and maintaining a long-term investment plan. With a good financial plan, it becomes easier to tide over the highs and lows of the market, and ultimately achieving your investment goals.
Investing during volatility is a critical skill that is honed through years of market experience. At Standard Chartered you can get comprehensive wealth products and insights to guide you.Find out now!
