MARKET VOLATILITY

AND RISK

Investors have much to think about when choosing and understanding investments. Extreme market volatility during the pandemic provided the most recent demonstration of how markets can swing wildly. Understanding volatility is vital to the overall process of choosing the right investments.

So what is it exactly?

Volatility is up-and-down movement of the market. It is a measure of risk but it is not necessarily the same as risk. A share can be high risk but not volatile, for example. Volatility keeps on changing, so there are periods of high and low volatility.

Volatility can be triggered by any number of things. The UK stock market can fluctuate because of problems on home soil as well as global issues. Goings on in the Eurozone, the US and problems as far flung as China all had a turbulent effect on markets. But volatility and short-term losses are inevitable and it’s important to accept they are part and parcel of investing.

It’s not possible to know when a big drop in the markets will hit. But the good news is that periods of losses are often followed by strong rallies, as we’ve seen since the coronavirus vaccines started to be approved and rolled out. 

Investors only worry about volatility when shares are falling. When this happens, remember that any loss or gain is only realised when holdings are sold. Until then, any losses (or gains) are just on paper.

It’s easy to fall into the trap of worrying about short-term movements, but since investments are for the long term, short-term volatility is not necessarily a reason to panic and make drastic changes.

Should you feel nervous, you can review the reasons why you chose your investments and take comfort that in time your savings should recover.

Risk is an important aspect of investing. The aim of an investment is to generate returns that will help to achieve your long-term goals. But this means taking some necessary risks to get there.

Matching your attitude to risk with your investments is crucial to getting the right portfolio for your needs. There’s no one-size fits all advice when it comes to investing, yet spreading risk is often said to be the golden rule of any stock market investment.

Strategies of long-term investing, diversification and regular saving will help smooth out any bumpy rides – in other words, volatile periods.

Diversification across different markets and asset classes will enable your savings to adapt to different markets, and crucially, reduce exposure to one individual area.

By investing regularly – a monthly amount – market dips can actually work to your advantage. When share prices go up, the value of your stocks rise. When they go down your next contribution buys more. This is known as “pound-cost averaging”. Regular investing also removes the need to get the timing right. Plus, buying stocks at a lower price means you get a higher return when the market swings back up.

The relationship between risk and return is an important one. All investments carry some element of risk but the higher the risk, the higher the potential return. But there are no guarantees. If you are considering an investment that offers high returns, ask yourself if you can afford to lose some or all the money you invest.

Your capital is at risk. The value of your Investments can go down as well as up and you may get back less than you invest.