Learning Resources

Stock Market Volatility: Should you be fearful?

13 Apr 2022

Stock Market Volatility | VI

On some days, your portfolio might be up 20%. On others, it might be down 30%.

Although it might be terrifying, stock market volatility is an unavoidable part of investing. Market declines are unpleasant, but they will happen at some point throughout your financial journey.

When the market is falling, though, it's difficult to remain calm. "Shouldn't I be doing something?" you think to yourself.

In every situation, there is always a decision that needs to be made. It might be confusing to know what to do for beginners and the things you should do might require some practice.

However, before learning how to reduce your risk from the stock market volatility, you need to understand what it is.

Fact: The stock market is volatile

As much as possible, we choose straight paths. But the stock market will never be a straight path.

Stock prices move up and down every day. What’s worse is we don’t have any idea when prices will jump and how high or when they will drop and how low. We could only hope and make predictions (which aren’t 100% accurate anyway).

This is just how the stock market works. The frequency and magnitude of price fluctuations, whether up or down, is what we refer to when we say stock market volatility.

Volatility is caused by…

Several factors cause stock prices to rise and fall. The two biggest drivers of any price fluctuations, however, are economic factors and the company’s performance.

1. Economic factors

Certain events may cause stock market volatility in a particular business or area.

For example, Russia is a significant oil producer and exporter, but as a result of the ongoing conflict and sanctions put on the country, the oil supply has decreased, forcing prices to increase.

As a result, oil-related companies' stock values will likely rise, whilst those with large oil costs in their businesses may see their stock prices fall.

See also: How Buying Stocks Actually Works

Similarly, stricter government regulation in any industry may cause stock prices to fall as a result of more rules, affecting future profit growth.

2. Company performance

Volatility is not always applicable to the entire market. It can sometimes be limited to a particular company.

When there’s good news, such as a great earnings report or a new product that can wow us as investors, it can increase investor confidence in the company. If a large number of people are interested in buying it, the increased demand may assist to push the price up.

On the other hand, a product failure, data leak, or poor management can cause investors to sell their shares. Depending on the scale of the company, its excellent or bad performance may have an impact on the bigger market.

Understanding market volatility

Stock Market Volatility | VI

The stock market’s volatility would require any smart investor to regularly reassess your asset portfolio.

Sharp declines may be used to buy more stocks and position yourself for future profits. Stocks that drop from recent highs will trade at a discount for some time before their share price rises again, and if their fundamentals are good, investors can profit.

When the market goes up, we could take some profits. Remember that share prices will only remain high for a certain time before coming back down. By taking profits on our positions and reinvesting our profits the next time there is a market crash, we can slowly grow our portfolio despite the volatility.

By doing these few steps, you are ready for either bull or bear markets and can stand to profit when either one happens.

So here’s how to reduce risks

In a volatile market, there are many methods for reducing risk. Diversifying your portfolio by investing in a variety of stocks is always a good idea.

It's never a smart idea to put all your money into a single investment. Yes, if the stock does well, you may make a lot of money, but anything can happen in such a volatile market. Slow, steady growth is usually better than rapid, unpredictable growth.

Below are methods that you can use to further protect yourself from the stock market volatility:

1. Practise diversification

As we have stated, diversification is the most important way to reduce risk. Over time, a well-diversified portfolio with a diverse mix of stocks will likely be less volatile than a portfolio with only a few similar items.

Likewise, losses in one area of a well-diversified portfolio are usually offset by gains in other areas.

Stocks of different sectors, for example, frequently move in opposite directions. In a one-stock-only portfolio, on the other hand, both losses and profits might have a greater impact.

2. Never time the market

Stock Market Volatility | VI

We can never predict which direction the market will go. Therefore, when we time our trades on when to buy and sell, we would be wrong most of the time.

At VI College, we always emphasise that “time IN the market” is always better than “timing the market.”

3. Practise dollar-cost averaging

Dollar-cost averaging is another way to reduce stock market volatility. When we invest a certain amount regularly, such as once a month or every year, regardless of market conditions, we would be able to average out the price of the stock we buy.

When prices are lower, you are more likely to purchase more, and when prices are higher, you are more likely to buy less.

The average price you spend for a stock will balance out over time, and as studies have shown, the market increases with time, so you will win if you play the long game and do dollar-cost averaging into each buy.

4. Control your emotions

When it comes to investing, emotions can beat our logical thinking.

When we find our portfolio in the red, most of us succumb to panic and sell or purchase a 'hype' stock to avoid missing out. In either case, we're dealing with our emotions rather than our heads.

So be focused on your goals and don't let short-term stock market volatility disrupt your long-term investment strategy.

Control your emotions and remember that overcoming bias during market peaks and falls is crucial to making informed financial decisions.

Remind yourself that just because other investors are buying riskier equities doesn't mean you should ignore those with solid fundamentals.

It's understandable to be fearful of the stock market volatility. We know it could be unsettling to see huge or even little losses in our portfolio.

Keep in mind, though, that market volatility is a normal part of investing, and the companies you invest in (if you’ve done your due diligence and are confident in these stocks) will adapt to a crisis. Likewise, volatility also presents us with opportunities to buy good stocks at a low price.

Investing is a long-term game so don’t let short term volatility affect your portfolio in the long term.

To learn more about how you can profit during a volatile market, join our free masterclass. Or learn about investing in the metaverse (cryptocurrencies, NFTs, web 3.0).

DISCLAIMER

This article and its contents are provided for information purposes only and do not constitute a recommendation to purchase or sell securities of any of the companies or investments herein described. It is not intended to amount to financial advice on which you should rely.

No representations, warranties, or guarantees, whether expressed or implied, made to the contents in the article is accurate, complete, or up-to-date. Past performance is not indicative nor a guarantee of future returns.

We, 8VI Global Pte Ltd, disclaim any responsibility for any liability, loss, or risk or otherwise, which is incurred as a consequence, directly or indirectly, from the use and application of any of the contents of the article.