Stock market volatility can feel unsettling, but it is normal and a vital part of how markets function. The key is to understand what causes volatility and how you can help protect your portfolio against the impact of short-term swings by planning ahead, staying calm, and following your investment strategy.
Volatility describes how much and how quickly a security or market index moves up and down, often with dramatic changes. It is a measure of uncertainty, and higher volatility usually means more dramatic price movements.
A volatility indicator like the CBOE Volatility Index (VIX), which is sometimes referred to as “the fear index,” tracks expectations of stock market volatility over the next 30 days, based on options pricing. A low VIX indicates stability; a high VIX signals uncertainty about future market performance, whether due to earnings reports, economic data, or geopolitical events.
It can be tempting to react impulsively in response to market volatility, especially during a sharp decline. However, doing so can lock in losses and derail your long-term investment plan. Instead, work with your financial advisor to develop a well-diversified investment strategy that is aligned with your risk tolerance and time horizon, and review it periodically to ensure it still matches your goals. This approach can help reduce the impact of short-term fluctuations by spreading your investments out over time, which helps reduce costs and taxes. This practice is known as dollar-cost averaging and can be an effective tool to help you stay invested through volatile periods.
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