Uncertainty drives market volatility and the present times are very uncertain thanks to the pandemic. It has not been unusual to see the Nasdaq, Dow Jones and S&P 500 move by five percent or more in one day.
This can mean that trillions of wealth can vanish or be created quickly. It is tempting for investors to forego future opportunities and gamble on market swings but that can cause long-term financial goals to fall by the wayside. Robust risk management is essential to achieve these goals.
What is market volatility?
Every day, the price of a stock can change as investors match the desire to buy future cash flows with the desire of stock owners to sell. Most days, the change is small and the movements up and down are under one percent. However, the stock market can be unpredictable with large price swings in either direction.
Janus Henderson Investors are global asset managers with expertise across all major asset classes. Their experienced global investment professions have clients around the world and they believe in active management of client portfolios to enable clients to meet their financial objectives.
Market timing
Market timing involves trading more frequently to pick exactly the right time to buy or sell a stock to make a profit and avoid a loss. Profiting from short trades is difficult to do over the long term and speculation is often involved. The reality is that short-term market movements can be very unpredictable and erratic, with speculators often making losses.
Investing versus speculating
There is a vast distinction between investing in the stock market and speculating. Investing involves identifying a goal and creating a portfolio that provides the appropriate return to achieve it without incurring too much risk. Investment is therefore focused on the long term and minimizing risk, whereas speculation is involved in taking risks over the short term.
An investor’s understanding of the potential amount of money a client can risk losing is essential in building a balanced portfolio. Trying to profit from stocks according to short term market movements could detract from long term financial goals.
Navigating market volatility
Some of the worst days in the market are often followed by some of the best days. Being patient is often the best course for investors when markets plummet. Some investors may panic and sell which means they lock in their losses.
It is best for investors to avoid emotion and to take financial advice from non-professionals. It’s an established fact that time in the market usually pays off more than trying to time the market.
A diversified portfolio
Creating a diversified portfolio is one of the best ways to deal with a volatile market. An effective way to manage investment risk is by spreading money across a range of assets that, historically, tend to perform differently in similar circumstances. A diverse and well-researched portfolio that takes an investor’s risk tolerance into account will be able to weather market volatility.
It is possible to diversify within one asset class but this may not insulate the investor from systemic risks, such as international stock market crashes. Investments across regions and countries can help to insulate a portfolio from crises in local markets.
Markets from across the world perform differently as they reflect short term sentiments or long term trends. Building a diversified portfolio across and within asset classes as well as taking regions and currencies into account is often not within the means of individual investors. Receiving help from professionals to build a diversified portfolio is a wise move.
