What do we mean by volatility?
Stock market volatility refers to the natural fluctuations in market prices. During periods of heightened volatility, prices can change rapidly and unpredictably, which can impact investor confidence and market stability. This can happen for all sorts of reasons - changes in a government’s approach to trade, instability in world regions, rises in interest rates, pandemics and many more.
Being aware of and mentally prepared for volatility throughout your investment journey means you could be less likely to be shocked by significant events when they occur. Sharp market falls can be unsettling and many long-term investors have experienced these. While they can be an opportunity for your cash to buy more units when the price is low, it’s also important to know that prices might fall further before any recovery.
Investing during these times can be rewarding in the long run, but it also takes patience and a steady mindset. By keeping a long-term view and understanding both the risks and opportunities, you’ll be better prepared to make thoughtful decisions and stay focused on your financial goals.
As with all investing, you should remember that the value of investments can go down as well as up and you could get back less than you invest.
Things to think about when markets are volatile
Review your investment plan
Has your long-term goal or your ability to save changed? If not, and your investment plan is still inline with your goal, you may want to stick with it.
Focus on your long-term goal
Remember, investing is for the long-term. Market falls can also present opportunity meaning your investment could buy more units in funds when the market is down. Markets can and have recovered over time (although there are no guarantees).
Avoid making rash decisions
Reacting to a market drop by selling your investments might feel like a way to avoid further losses but it can lock in those losses. If the market recovers later, you could miss out on potential growth. While volatility can be unsettling, it’s important to remember that markets go up as well as down. Selling during a downturn means you might miss out on potential rises following a fall.
Don’t put all your eggs in one basket
Spreading your investment across different types of investments or funds could help soften the blow if an area of the market isn’t doing well. While some may rise, some may also fall and over time, there is the potential for your investments to balance out.
How much risk are you happy with?
Investment funds have different levels of risk. If market volatility is uncomfortable you could think about choosing to invest in a lower risk fund or funds with a guarantee.
Stock markets have overcome setbacks before
Investing is for the long term. Setbacks happen, but history shows that markets can recover. The graph below is a demonstration of the growth in value of £1,000 lump sum invested in global markets since June 2010.
Past performance is not a guide to future performance. The value of your investment can go down as well as up and you could get back less than you invest.
