The stock market never stays still. Every day, the market indexes see gains and losses. In more settled periods, the S&P 500 tends to lose or gain less than 1% a day. Kavan Choksi mentions that there are also times when the stock market experiences dramatic price changes, which is a phenomenon known as “volatility.” Even though increased volatility can be a sign of trouble, it is next to inevitable in long-term investing. Moreover, at times, this volatility can actually be the key to investing success.
Kavan Choksi offers a general overview of stock market volatility
Market volatility involves the magnitude and frequency of price movements, up and down. The more frequent, and bigger the price swings, the more volatile the market is said to be. Market volatility is quite a normal aspect of investing in the stock market. It is assessed by calculating the standard deviation of price fluctuations over a specific timeframe. The standard deviation illustrates the degree to which values deviate from an average. One must remember that the higher the standard deviation, the more volatile the portfolio shall be, moving more significantly either above or below the average. Understanding standard deviations becomes important for investors as they not only indicate the potential extent of value changes but also provide insight into the likelihood of such changes taking place.
Markets may encounter periods of heightened volatility pretty frequently. Investors should typically be prepared to see volatility of about 15% from average returns during a given year. In most cases, the stock market is calm, having just brief periods of above-average market volatility. Stock prices do not fluctuate significantly on a constant basis. There generally are long periods of not much excitement, followed by short periods with big moves up or down. These occurrences contribute to an inflated average volatility compared to typical days. Typically, periods of bullish market trends are linked with lower volatility, while bearish markets are characterized by erratic price fluctuations, often in a downward direction.
Kavan Choksi mentions that while there are several ways to react to the up-and-down activity of one’s portfolio, it generally is unwise to panic sell after a big market drop. People should consider stock market investing to be a long-haul game. For the long-term investors, volatility is just part of the ride to significant growth, as long as they have a well-balanced and diversified portfolio. Market volatility is unlikely to be too much of a problem unless one needs to liquidate an investment. It may help people to deal with market volatility mentally by thinking about how much stock they can buy while the market is in a bearish downward state. Periods of volatility especially allow investors to buy stocks that have been strong over the past few years at discounted prices. For instance, during the bear market of 2020, many investors got the chance to buy shares of an S&P 500 index fund for roughly a third of the price they were a month before after over a decade of consistent growth.
