So far in 2022, the stock market has experienced plenty of ups and downs. So, you could be forgiven for wondering whether this is the right time to invest some of your hard-earned money. There is currently much noise in the market that is making investors uneasy. And if you fail to keep your cool when the market is volatile, the short-term noise could lead to a long-term loss. However, here I look at four reasons why current stock market volatility shouldn’t put investors off.
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What is stock market volatility?
It’s simply a measure of how much the market’s overall value fluctuates over a given period of time. And to be more precise, we can calculate volatility by looking at how much an asset’s price varies from its average price. So for example, the market could become more volatile in uncertain times, as it was at the beginning of the Covid-19 pandemic and is now as a result of Russia’s invasion of Ukraine.
And because no one knows what will happen, the uncertainly can lead to frantic buying and selling. With that in mind, let’s take a look at four reasons why such volatility shouldn’t change your plans.
1. Get used to uncertainly if you plan to invest long term
Let’s be honest, the stock market outlook is always unclear. Like Matthew McConaughey told Leonardo in the Wolf of Wall Street, nobody knows what will happen to a stock. It’s only when we look back that we spot the obvious and the red flags.
In 10 years’ time, we’ll know how the pandemic unfolded and when the war ended. But for now, if you decide to step away from the market because of its volatility and things work out for the better, then you won’t be able to wind the clock back.
2. Don’t underestimate the time you spend in the market
Time in the market beats timing the market. This approach stands the test of time, partly because the market cycle is different from both the economic and news cycle.
Investors are less concerned with the noise at the moment than what might happen in the future, as they tend to anticipate it. However, predicting the direction or the changes in the market is hard, if not impossible.
So, trying to time the market only increases your risk of making a loss. This is because missing even a handful of the best market days will seriously impact your long-term returns.
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3. Diversification helps to smooth returns
It is extremely unlikely that every type of investment will perform poorly at the same time. This is why you should stick to a long-term approach in times when the markets are volatile. For example, when shares perform well, bonds often don’t and vice versa. Other asset classes like real estate or commodities could also take pole position. This is why diversification can provide a good defence against stock market volatility.
A portfolio that is spread between different assets and across different geographies can save you a lot of stress during times of uncertainty.
4. Volatility is part of the long-term investment cycle
There is always a reason for heightened volatility in the market. It’s inevitable, partly because of investors’ human instincts to react to events in the political, economic or corporate world.
The key is to expect some market movement. Then you can respond rationally to the volatility and stay focused on your long-term goals. Simply put, well-diversified and well-focused investors should not be intimidated by volatility. In fact, when markets move, this can offer opportunities to buy assets at a discount.
Takeaway
There’s no doubt that stock market volatility can be painful for investors. But they can also offer attractive opportunities. Either way, remember to keep your cool during uncertain times and focus on your long-term goals.
If you are new to investing, be sure to check our beginner’s guide. More experienced investors may want to take a look at some of our investing principles for volatile markets in action.
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