Market volatility can mean uncertainty and unpredictability. And if there’s one thing investors tend to worry about, it’s uncertainty. After all, most investors want a stable return on their investments.
But markets aren’t always tranquil. Some days they’re up. Some days they’re down.
Here’s the thing. That’s normal. Markets always change, they are unpredictable and sometimes they can be volatile.
What is market volatility?
Broadly speaking, market volatility measures the rate of deviation away from an average. In other words, when experts think of volatility, they look at the degree of change in a security’s price over time.
In the case of investments—stocks, bonds, ETFs, etc.—financial experts use volatility to gauge an asset’s value over a given time, compared to an average or index. The more an asset’s price moves, the more volatile experts consider it to be.
Generally, individual stocks are more volatile than bonds, ETFs, and mutual funds. That’s because an individual stock is issued by a single company, and many different factors, both inside and outside the company, can affect how it performs. Bonds tend to be less volatile because they are a form of debt with specific plans for repayment. And funds are potentially less volatile than a single stock because they are baskets of stocks (or bonds), which can help spread risk by investing in numerous companies at once.
Many things can cause volatility, including political uncertainty, news related to a specific company and its stock, or investment dollars flooding into or out of the market.
Financial experts use volatility to gauge an asset’s value over time, compared to an average or index.
What’s the Vix?
Often when people on Wall Street talk about volatility they’re referring to the VIX.
The VIX is another name for the Chicago Board Options Exchange’s Volatility Index, a stock index that measures the amount of volatility in U.S. markets using a numerical scale.
Deeper dive: beta
If you want to look at the volatility of an individual stock, you want to find something called its beta. Beta is a measurement of an asset’s volatility and can be found on many stock research websites.
If the beta is less than 1, generally that means the asset is less volatile than the overall market. A beta of more than 1 means it’s more volatile.
Volatility: Why it matters to you
As a long-term investor, you don’t necessarily need to pay special attention to the short-term movements of the VIX, or of a stock’s beta.
However, you should be aware generally of how your investments behave in low and high-volatility environments.
Diversification can help protect your portfolio
Market volatility is part of investing, plain and simple. By staying diversified, you can potentially protect your portfolio from market storms and turbulence.
Put your money in a variety of different investments that are not subject to the same risks and therefore are less likely to share the same fate.
Nobody can foresee the future. It’s impossible to know what will happen tomorrow in the political world, in the economy, and around the globe. It’s also hard to know what fate might befall a certain company or industry.
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