There appears to be a pre-notion that market volatility is nothing but a detriment to markets and investors. Although there are inherent negative aspects, this line of thinking can be dangerous. Acting solely on short-term volatility can do more harm than good. Volatility can drive the novice investor to question his or her own investment strategies, strictly due to short-term fear. It is crucial for investors to understand that volatility is inevitable and attempting to navigate around it is risky. Markets tend to move up and down in the short-term and volatility should not be the deciding factor as whether investors should or should not immediately exit. With a strong understanding of volatility and its causes, investors potentially can take advantage of investment opportunities which may result from volatile markets.
Although volatility sounds terrifying, it is important for investors to develop a strong working knowledge of it so they can make educated investment decisions. Market volatility is the statistical measure of a market’s or security’s tendency to rise or fall sharply within a short period of time. Measured by standard deviation, volatility can be caused by the imbalances seen within trade orders in one direction or another. Volatile markets are characterized by wide price fluctuations and/or heavy trading. It is important to note that there are no conclusive catalysts behind the causes of market volatility. With that in mind, investors can leverage their time more effectively by learning strategies to deal with volatility instead of trying to prevent it.
One effective method commonly used in times of market volatility is to stay the course. This means that as an investor, you ignore the short-term chaos and leave your investments status-quo until the volatility passes. You stay the course despite the current overreaction of the market. Even though this may seem lazy and counterproductive, it may insulate you from losses associated with attempting to time the market.
Market volatility can also create opportunities that an astute investor can take advantage of. Volatility can actually provide entry points for those investors whose time horizon and investment strategy is long-term. Downward market volatility presents investors, who are bullish and believe markets will perform well in the long-run, with the opportunity to purchase additional shares at lower prices. Increasing your position at a discount can be a very powerful strategy. In effect, you are lowering your average cost per share of that particular security.
No matter how you elect to handle your investments during times of market volatility, it is very important to review your portfolio with a qualified financial advisor. Having a distinct philosophy for all markets will help you navigate without emotion. Be sure to check out the latest Mitlin Minute to learn more about volatility. If you are unsure how to proceed the next time the markets become volatile, or you just want to be proactive, contact Mitlin Financial at (631) 952-4466 x12 and allow us to help you navigate in a fashion that is conducive to your goals, investment needs and risk tolerance.
Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.