Stock market volatility can feel scary, especially when you’re watching your portfolio balance swing up and down in response to headlines. But it’s important to remember that market fluctuations are a normal part of investing and often provide opportunities for long-term growth.
There are a few key things to keep in mind about volatility and ways to help manage it.
Volatility measures the magnitude of a stock’s price swings, and it can vary widely from one investment to the next. Shares in a blue-chip company may not experience big price changes, while those of a high-flying tech stock could see much more significant shifts. A stock’s volatility is determined by its standard deviation, which is calculated from the average return over a given period of time (like a month or a year).
A stock’s volatility can also rise when investors feel nervous about economic factors, such as disappointing company earnings, or rapid or unexpected changes in government policy. The latter is particularly common during election years, when political rhetoric can create uncertainty about the future.
A financial professional’s job is to understand what’s happening in the markets, and translate that information to you. They can help you develop a strategy that aligns with your tolerance for volatility and helps you stay focused on your long-term goals, even during challenging periods. They can also help you identify potential investments that become more reasonably priced when stock prices drop. Finally, they can help you establish a safety net of cash that can be used to cover living expenses in the event of an emergency or a stock market downturn.