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Looking at the Bright Side of Market Volatility
November 15, 2022
What goes up must come down, a popular maxim attributed to Isaac Newton, is particularly applicable during times of market turbulence. The market has recently seemed to plummet again just as investor portfolios were starting to recover from the previous market decline. Although the frequent ups and downs might be unsettling, market volatility has a bright side to it.
Market volatility generates opportunities for investors
Although timing the market is exceedingly difficult, times of volatility offer the chance to buy shares of stocks for less money than usual. For instance, if you have an optimistic market outlook for the long term, making more bets when the price of stocks declines may enable you to buy a $100 stock for $50. This decreases your cost per share, thereby allowing you to buy more shares at a discount to enhance the total return on your portfolio when the market recovers over the long term.
Over the past 91 years, the S&P 500 has gone up and down each year. In fact, 27% of those years had negative results. Timing the market has proven to be almost impossible. Dollar cost averaging is an excellent strategy to benefit from decreased pricing. This is the process of making regularly scheduled equal investments over a period of time. You may buy more shares when prices are low and fewer shares when prices go up by continuously investing irrespective of an asset’s current stock price without having to try and predict where the market is going.
Business innovation is compelled by market volatility
If “a rising tide lifts all boats,” then boats that aren’t ready to adapt will be sunk by a falling tide. In other words, most firms expand when the stock market increases gradually. The innovators are revealed, though, when the market prices fall and the tide turns. Market instability may encourage businesses to cut back on unnecessary expenditure, concentrate on their finest concepts, and devise fresh, creative methods to set themselves apart from their rivals.
Investors pay attention because of market volatility
Investors commonly become lulled into a false feeling of security during extended periods of consistent, predictable profits. This might lead to investors taking on excessive risk in the hopes of generating even higher profits. A sharp unexpected market decline might act as a wake-up call for investors who have strayed from their intended level of risk. Market volatility serves as a fantastic reminder of the value of creating a long-term investment plan that takes into account your appetite for risk, timeframe, future goals, and present financial circumstances.
Market volatility influences the development of investment strategies
Investment managers find it simple to draw customers and increase their assets under management when the market is steadily rising. Unfortunately, volatile times might bring to light weak spots in their investment plans. Market volatility serves as a stress test for a good investment manager, who will act rather than react by developing fresh concepts that outperform the prior plan.
For instance, many investment managers became aware that their strategies were more tightly tied to the markets than they had previously thought during the 2008–2009 market collapse. Some of these managers started looking for methods to diversify beyond stocks and bonds into different kinds of alternative investments as a consequence. As a result, a completely new asset category for private investors emerged. Market volatility led to the creation of alternative investment methods with the requisite liquidity and transparency to be suitable for individual investors, which were previously only available to institutions and extremely wealthy individuals.
You may be curious on what is the ideal approach to invest during market volatility. The answer, like with so many other questions pertaining to financial planning, is “It depends on your specific situation.” For instance, a 25-year-old just starting to invest will adopt a different strategy than an investor who wants to retire in five years. Collaborating with a competent wealth manager to create a comprehensive portfolio allocation that takes into account your financial objectives, present circumstances, risk appetite, time horizon, retirement income needs, estate planning objectives, tax saving strategies and other factors is the best course of action.
Disclaimer:
- The information provided is for educational purposes only and does not constitute personal financial, tax or investment advice and should not be relied on as such. It does not take into consideration any investor’s particular investment objectives, strategies, time horizon, and tax or legal status. Abacus Wealth International (AWI) does not provide tax or legal advice. Please consult a tax or legal professional for corresponding tax and legal advice.
- All material and content have been obtained from sources believed to be reliable. AWI does not guarantee the accuracy of the information provided and shall not be held liable for decisions based on the foregoing information.
- All examples of graphs, financial products and historical returns contained in the foregoing material are for illustration and educational purposes only and shall not be deemed as financial advice or recommendation. Past performance is not indicative of any future investment returns.