It was a turbulent spring for the stock market. Within weeks, the Dow Jones Industrial Average (DJIA) lost more than a third of its value, going from 30,000 in February to 18,591 in mid-March.
As an investor, a turbulent—or volatile—market can be concerning, especially if you see your retirement savings lose value. You may wonder what you’re supposed to do. Should you cash out? Move your money around? Do nothing at all?
Here’s what you should know about trading in a volatile market.
What Is Market Volatility?
Market volatility is big swings in a short period of time. The degree of volatility for a market or an individual investment depends on how much movement is the norm.
Both the stock and bond markets fluctuate every day, often for different reasons due to the different types of securities they represent.
Primary Causes of Market Volatility
Volatility is a normal part of investing. Many events or factors can cause the markets to go up and down, from unexpected news to political developments to public relations disasters. And, we’ve seen that a pandemic can cause big changes in markets.
Situations that can cause market volatility include:
National calamities, such as a negative economic situation or a natural disaster
Economic growth changes, which are reflected in reports such as employment numbers, consumer prices and manufacturing activity
Geopolitical risks, such as wars, terrorist acts and tensions between countries
Political factors, such as announcements affecting a country’s leadership
News, such as a scandal hitting a large, publicly traded company
National monetary policy, such as actions taken by a country’s central bank (for example, the U.S. Federal Reserve)
How Do You Evaluate Risk in a Volatile Market?
One concept to keep in mind when evaluating volatility is risk vs. return. The idea is that if you take on a lot of risk, you would like to be compensated for that risk. Higher levels of risk generally go hand in hand with the potential for higher returns, but also with the potential for heavier losses.
If you’re more conservative and not comfortable with the potential losses, then you can choose investments that historically have offered lower levels of risk. That decision foregoes higher potential returns, favoring a possibly safer portfolio with lower potential gains. A lower risk portfolio might have less in equities and more in bonds or cash.
How Do You Trade in a Volatile Market?
First, every investment is going to have its ups and downs. Those close to retirement or investing for a nearer-term goal like college may want to take more precautions. If your goals are decades out, then you have years to go until you need to withdraw the money. By then, any dip in your investment balance will hopefully have recovered.
Volatility can prompt people to change their investing habits. In a recent survey, we asked clients if they had adjusted their approach due to recent market ups and downs. See the answers below.
American Century Investments conducted an email survey on May 1st, 2020, asking, “Have you changed the way you’re saving or investing?” 76% responded, “Nothing has changed. I’m not doing anything differently with my savings and investment accounts.” 12% responded, “I’m adjusting my savings and investment routines because I’m worried about the market.” 6% responded, “I’m starting or contributing to an account to save more for potential emergencies.” 6% responded, “I’ve stopped adding to my investments.”
Second, it’s key to assess your appetite for risk. Are you comfortable with big swings in your portfolio value? How big? Really ask yourself if you’re prepared to handle the stress of watching your investments lose (and hopefully regain) value.
Third, be prepared to set your emotions aside. If you have a sound long-term strategy, don’t let fear or anxiety lead you to make rash decisions that derail your investing plans.
If you want assistance, call us. We can help you evaluate your portfolio and make decisions when the market gets turbulent.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.