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By Ruan Breed*
Are you feeling nervous because of recent swings in major stock markets? You’re certainly not alone. Many of us watch our investment portfolios with a mix of concern and confusion during these times of high volatility.
Understanding the dynamics of the market’s ebbs and flows and learning how to navigate them can not only ease your concerns, but also place you in a stronger financial position. Here’s a closer look at what causes market fluctuations and two key strategies that can help you manage your investments more effectively during these times.
What is market volatility?
Market volatility is basically how often and how much stock prices go up and down. Think of it like the weather – it changes a lot and can be hard to predict. These changes can happen for many reasons, like what’s going on in the world, how companies are doing, and how professional investors are feeling.
It’s important to know that these ups and downs are a normal part of investing, kind of like how we expect sunny days and rainy days. Understanding this helps you be better prepared psychologically for the ups and downs.
It also helps to know that factors beyond your control will move markets – sometimes for the good, and sometimes for the worse. Indicators like inflation, interest rates, economic growth and the state of the rand vs the US dollar all influence how confident people feel about investing and how well the market does.
This year, elections in South Africa and the US will no doubt add more intrigue to how markets are going to perform in 2024.
Investor sentiment and market reactions
How investors feel and act really affects the stock market. Good news can make everyone want to buy stocks, which makes prices go up. But bad news can do the opposite, making people sell and prices drop.
This kind of group thinking can make the stock market act like a rollercoaster, going up and down, sometimes not even matching what’s actually happening in the economy.
This was clear to see when looking at the major stock indices over the last few years. The S&P 500, for example, started with a big drop of 30% at the start of the pandemic, recovered and then grew 27% in 2021. The next year, however it fell 20% and then last year grew by 20%.
This pattern of highs and lows is a classic example of market volatility in action, showing how quickly things can change in the world of investing.
Understanding these swings is key to developing strategies for navigating market volatility. It’s about finding ways to stay steady and make informed decisions, even when the market feels like a wild ride.
Two strategies to help navigate market volatility
1. Resist the urge to sell in panic
When the market dips, it’s common to feel a sense of panic and consider selling your investments to prevent further losses. However, this is often a short-sighted move. Markets have historically shown a tendency to rebound over time.
By reacting hastily to short-term fluctuations, you risk making temporary downturns permanent. Instead, view these market dips as part of the investment journey – a test of patience and resolve. Staying invested through these periods can allow your portfolio to recover and potentially grow in the long run.
2. The power of diversification
A well-diversified portfolio is like having a balanced diet for your finances. It spreads the risk across different investment types, sectors, and geographical regions. While some investments might be underperforming, others could be making gains, helping to offset losses and stabilise your portfolio.
Regularly reviewing and adjusting your investments to align with your long-term financial goals and risk tolerance can make a big difference in how market volatility affects your portfolio. This doesn’t mean you won’t experience fluctuations, but it can make the ride less bumpy.
In volatile markets, it’s vital to revisit your financial goals and risk tolerance. This exercise can help you understand whether your current investment strategy is still aligned with your long-term objectives. It’s about staying true to your financial course, even when the waters get rough.
Dealing with the ups and downs of the stock market can be tricky. It might be a good idea to talk to a financial advisor who can give you impartial advice that fits your specific situation.
I find that whenever markets get choppy it’s best to remind yourself that investing, like any journey, comes with good and bad times. If you keep focused on your long-term goals, you can get through the rough patches. Being patient, tough, and having a plan can help you handle the tough times and even benefit from them. It’s not about avoiding rough weather, but learning how to handle your boat no matter what the weather’s like.
* Ruan Breed is a financial advisor at Brenthurst Stellenbosch and George [emailprotected] .
Read also:
- 3 ways to fine-tune your investment strategy in 2024
- 4 steps to investing for retirement if you’re self-employed
- Four easy money lessons every child deserves to learn
