Market volatility describes the size and frequency of price fluctuations in individual securities and market indexes. When prices rise and fall dramatically, the resulting turbulence can make investors uneasy, potentially triggering emotionally driven investment decisions. Understanding how market volatility works may help you find strategies to mitigate risk and navigate the ups and downs of short-term volatility more effectively.
Many things can trigger market volatility, including political uncertainty (like the ongoing debate over how to reform the federal budget), news of economic concern, and a sense that the economy is slowing down or that interest rates are about to rise. Events like natural disasters and global strife also create volatility by creating uncertainty about future growth.
Rising volatility often signals that investors are spooked or fearful, while lower volatility can signal stability — or even complacency. Watching indicators such as the VIX Index can offer insights into broader market psychology.
Investors can take steps to prepare for periods of increased market volatility, and focusing on their long-term financial goals can help them keep a steady course through any short-term choppy seas. For example, it’s a good idea to have an emergency fund that contains enough funds to cover at least six months of living expenses and isn’t tied to the performance of your investments.
Investing for the long term is typically a good strategy, as long as you understand that investing involves risks and your portfolio is built with a mix of assets to diversify your risk. Having an appropriate time horizon and using dollar-cost averaging can also help you manage the effects of volatility.