Turbulence in the markets and a lot of noise around so-called opportunities can create a heady environment for investing. With so much noise, how can you know what to do? Here we take a closer look at market volatility, and offer some “dos” and “don’ts” for the investor preparing for retirement.
Global and national economic factors, tax and other government policy, interest rates, and influences from a variety of industry sectors can all have a say in how the market behaves. And when that behavior is more erratic or fluctuates more than “normal,” it’s referred to as volatility.
What is market volatility, exactly, and how is it measured?
When you think of volatility, you might picture a stock price roller coaster ride. That image is pretty spot on. Market volatility has to do with the up-and-down movements of stock prices. In a volatile market, prices rise and fall, and do it all over again, over a prolonged period of time.
From a more technical perspective, volatility is a measure of the range of possible returns on an investment or the risk inherent in a particular investment (known as dispersion). Looked at another way, it’s a measure of how a stock price has changed compared with a benchmark or average.
Financial experts measure volatility in a few different ways, measuring day-to-day, month-to-month or other periodic movements in price. One way to measure volatility is using the standard deviation, which indicates how closely a stock’s price is adhering to the mean or moving average (MA).
If prices are grouped tightly, the standard deviation is small. If stock prices are spread out, the standard deviation is large. Those larger standard deviations are indicative of higher dispersions of returns and increased investment risk, according to Modern Portfolio Theory.
Generally speaking, more volatility correlates with a higher probability of a declining market, and less volatility correlates with a higher probability of a rising market.
To get a sense of where the market may be going in the next 30 days, experts look to the Chicago Board Options Exchange (Cboe) Volatility Index (VIX). The VIX calculates “implied volatility” to get a read on expected future volatility. The calculations are based on investor agreements to buy and sell certain stocks at a later date on the Standard & Poors 500 Index. Typically, when the VIX goes up, the S&P 500 Index goes down, and vice versa.
So, what does all this mean for the investor who is preparing for, or already in, retirement?
While it can be easy to get caught up in the fervor surrounding a volatile market, there are more productive approaches.
Here’s what we recommend you don’t do:
Don’t think short term. Investors who have a long-term plan, and stick with it, are the ones who historically have come out on top.
Don’t try to make a quick buck. If an investing story is in the news, you’re too late. Volatility trading is not for the faint of heart or the average investor.
Don’t make portfolio changes based on fear. Whether it’s fear that you’ll lose money, or fear of missing out on big gains, fear is never the right motivating factor.
Don’t obsessively check stock prices. Monitoring the financial news for the latest headlines or trying to keep the daily pulse of your portfolio will only be troublesome for your heart.
Instead, we recommend that you take a long-term view that is rooted in a strong financial plan:
Do remember that volatility is normal. It’s part of investing and will be part of the lifecycle of your portfolio. Ups and downs, to a certain degree, can even signal health in the markets.
Do stick with diversification. This is a long-held, widely relied upon strategy for a reason. Diversifying your portfolio across a variety of assets provides the best protection and best long-term strategy.
Do let your investing strategy be informed by history. While there’s no guarantee of future performance, historically every period of heightened volatility and loss has been followed by unprecedented rebound.
Do ask your advisor about other assets. If the stock market is keeping you up at night, ask your wealth advisor if it might fit with your financial plan to include other assets in the mix, such as commodities or real estate.
Do seek perspective from your wealth advisor. He or she has both all the historical data needed to provide necessary perspective, as well as up-to-the-minute information to inform your investing decisions. Your wealth advisor is your best resource and will be able to guide you as steadily as possible through any ups and downs.
Do you need the steady hand of a wealth advisor during these uncertain times? Find out how our personalized approach to wealth management can help you create a financial plan that will set you on solid footing and bring peace of mind. Contact us today.