Stock market volatility measures how much and how often the market’s value rises and falls. Increased market volatility can occur due to political activity, policy changes, economic turbulence, and even natural disasters.
Stock market volatility measures the frequency and range of price changes over time. During periods of larger, more frequent price swings, the market is considered more volatile. By contrast, when prices change incrementally instead of drastically, the market is considered less volatile. Individual stocks can also experience volatility.
Market volatility may occur due to several factors (and often more than one at a time), such as:
Economists measure market volatility by looking at the standard deviation of prices over time. Essentially, this mathematical metric shows how far stock prices differ from the average or baseline value. The higher the standard deviation, the more volatile the market, and vice versa.
Generally, bear markets come with higher volatility. These periods typically translate to greater investing risk, as you stand to lose more money when the market swings wildly. But high volatility also comes with the potential for greater gains, especially if the market soars suddenly.
On the other hand, bull markets are usually associated with low volatility. While prices broadly trend upward in a bull market, they tend to increase slowly rather than suddenly.
Market volatility is also associated with investors’ fears of and reactions to uncertainty. For instance, at the start of the Covid-19 pandemic, investors dumped stocks like they were hot. This kicked off a highly volatile market that saw enormous losses initially–and then rapid, sometimes unexpected gains over the next two years.
Volatility is a given in investing. While it’s never guaranteed that the market will experience X volatility in Y year, what is guaranteed is that the market will see some level of volatility every year.
Thus, when–not if–volatility occurs, it helps to be prepared. Keep your long-term plan in mind and stick with it, even if the markets continue to expand and contract. Remember: Investing for success is a long-term marathon, not a short-term sprint.
You can also view volatility as an opportunity to capitalize on the markets by increasing your positions in high-quality, low-priced securities. (Just don’t forget to rebalance your portfolio when the volatility eases up to bring it back in line with your overall strategy.)
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