Volatility has become a buzzword in investing, but what is it, and how can you best manage it? Read more.
What is Volatility?
Volatility is one of the most important fundamental concepts for understanding the financial markets and the economy as a whole. In short, it is the amount of risk inherent in a financial instrument. At its most basic level, it refers to the speed at which a security’s price changes relative to the security’s value—or, in other words, its “movement.”
Everyone knows that volatility is a big problem in the market. Many investors, in particular, are uncomfortable with the fact that they have no control over the volatility of the markets they invest in. To many investors, managing it is a constant struggle. With the stock market crashing on a regular basis during the financial downturn, it’s easy to feel like your portfolio is about to plummet into the abyss at any moment. But, it doesn’t have to be this way.
A situation can get volatile at any time. But such a situation is more likely to create havoc and wreak havoc if you don’t understand it. It can be anything from a market crash to a stock market crash to a currency crisis. It can be something new or something old, something big or something small. Volatility can be a result of something you want or something you don’t want. But one thing is for sure: the best way to manage it is to understand the concept.
Here are the following ways to manage volatility:
Invest in a broad, more diversified portfolio.
Diversification is important for a portfolio, but it’s easy to get lost in the terminology and forget that it’s really just a way to make sure you’re not taking all of the risks in one particular investment. While diversification can make you feel less vulnerable with the portfolio, it’s important to remember that diversification will not make the portfolio less volatile.
Make an investment regularly.
Even if you’re not yet ready to make the big leap of investing in a portfolio, there’s no reason not to start investing. It doesn’t have to be anything exciting, just a small amount every month or so. You can make this an automatic process or do it when you get paid. Either way, a little bit every month will get you on the path to accumulating wealth.
Be aware of your timelines. Many people in the financial industry call volatility “the enemy.” The general sentiment is that it makes for terrible trading and a less-than-ideal investment environment. However, many people in the financial industry have chosen to see it as a positive attribute in their trading and investment strategies. This is because volatility can make trade more profitable, and it provides the opportunity to make a lot of money in the future. The best way to manage it is to know what you are doing and when you are doing it.
Make sure you’re ready for the best or worst outcome.
While it’s true that it is something that can be managed, it is still important to hedge as much as possible. This means that you should have an insurance policy for your portfolio in case of an unexpected event. It can be difficult to keep on top of all the news about the stock market, but you can make things much less confusing with a little bit of work. There are lots of ways to track what’s happening in the stock market, including online news sources, subscription services, and websites.
Avoid any impulses by not checking your investments at all.
It’s easy to get swept up in the daily ups and downs of the markets, but that’s a mistake. It’s important to focus on your long-term investment goals, not the daily ups and downs of the market. If you plan to achieve your goals and keep that plan in your mind, you’ll be less likely to panic when the markets are volatile. However, there are always ways to manage volatility in the markets. You can diversify your investments, use options strategies and portfolio management strategies, and use other tools to “control” your investment risk.
For many, volatility is a dirty word. It’s associated with large movements in prices that cause investors to panic, act and make unwise decisions. However, if you get to manage it properly (well, with the help of the above-listed ways, of course), you can look forward to a more fruitful investment.