The stock market has been very “volatile” throughout the year 2022. During the early stages of COVID-19, the stock market was "volatile.” Haven't we all heard the term "volatile" too many times in stock market discussions or market commentaries? But what does it actually mean in this context? Let’s find out.
Basically, “volatility” occurs when stock markets experience frequent and unpredictable price movements, either up or down. A more technical definition is that volatility is the standard deviation of a stock's annualized returns over a given period and indicates the range within which its price can rise or fall. To simplify, a stock is said to have high volatility if its price fluctuates rapidly in a short period.
Factors such as political and economic conditions, company performance, earnings reports, and interest rate decisions can all contribute to market volatility.
Why should you care?
Understanding how market volatility works can help an investor position themselves. Let's assume you need a new washer-dryer and the model you want is currently on sale. Would you rather wait for the price to rise again or take advantage of the current price drop? Few of us would be upset if we already purchased it at its original price. Market volatility can be viewed as a silver lining for those who believe that their stocks will perform better in the long run. When a stock rises rapidly, the process is the same. Investors take advantage by selling out and investing the proceeds in other areas with greater potential.
Ways to navigate through market volatility
There are numerous ways to respond to your portfolio's ups and downs. But one thing is certain: Investing is a long-haul game so keeping your long-term strategy in mind helps.
You can’t always time the market! When investors attempt to ‘time the market’ they risk buying high and selling low. Volatility in the market may offer the opportunity for higher returns, but only if you're able to weather short-term discomfort. Investors can handle market fluctuations better if they maintain a cash reserve based on their living expenses. To avoid being caught short in a difficult market or reaching a point where you have to liquidate your investments, make sure you have enough money on hand to last through a downturn.
People frequently associate successful investing with trading on a hot tip or chasing a trend. You might come across a story about someone striking it rich by "playing the market," but those are the exceptions, not the rule. Rather than the thought of becoming a millionaire overnight, watching our investments grow over time is indeed a safer form of investing. Market volatility is an unavoidable part of the investing process. However, a financial professional could assist you in keeping volatility in perspective and your goals in sight.
This material has been distributed for informational and educational purposes only and the opinions expressed represent the views of the author and not necessarily those of Wahed Invest LLC or any of its affiliates, directors or personnel (“Wahed”). Any assessment of the market environment as of the date of publication is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice. Wahed assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. Any strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security.
Furthermore, the information presented may not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services and should seek advice from an independent advisor before acting on any information presented.
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