Stock market volatility can create investor fear and uncertainty. But understanding it may help investors avoid the trap of chasing prices and focus on what really matters for their financial future.
Volatility is a measurement of how much a security’s price fluctuates relative to the overall market or a benchmark index. It can be calculated in many ways, including standard deviation (how far a stock’s price moves from its average over a certain period) and beta (how much a stock follows a benchmark index like the S&P 500). Implied volatility is also important to consider because it’s a measure of expectations of near-term volatility conveyed by option prices.
Market volatility often spikes when external events cause uncertainty. For example, during the COVID-19 pandemic in 2020, the major stock indices routinely rose and fell by more than 1% in a single day as people struggled to understand how the disease might affect them and the economy.
Changing political landscapes can also prompt volatility as people wonder how new policies will play out and who might benefit or be hurt by them. Uncertainty about economic factors, such as inflation or interest rates, can also unsettle markets.
One way to help manage the impact of market volatility is to have a strong emergency fund. Another is to talk with your financial professional about minimizing risk as you approach retirement or other goals, which might include rebalancing your portfolio. It’s also a good idea to review your financial plan on a regular basis to ensure that it remains aligned with your primary objectives and able to withstand the ups and downs of volatile markets.
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