Market volatility is a measure of trading price movements in a securities market—often measured by the standard deviation of returns or how spread out the return possibilities are from the average return.
Equity markets can be volatile at any stage. Both falling and rising markets are subject to market volatility. Sometimes intense or extreme price swings can lead investors to make emotional investment decisions. However, when viewed from a longer-term perspective, short-term wiggles may even out to form a different pattern over longer periods, and from our observation of markets, we have seen historically this has meant positive equity returns over the long-term—think over 20- or 30-year periods.
It is natural to fear volatility, as times of uncertainty and change can be extremely challenging. However, volatility is often unpredictable and can be extremely short-lived. Trying to time the market and side step all negative volatility is nearly impossible and could harm the returns of your investments over the course of your portfolio's lifetime. It's also important to remember that a volatile market doesn’t mean only negative volatility. Yes, negative volatility may reduce the value of your investments—at least in the short-term—but your portfolio can similarly benefit from positive volatility.
In fact, for many equity investors, this volatility is the price they must pay to capture equities’ long-term returns. Investors may struggle to remain calm and disciplined in the face of both positive and negative volatility, but this discipline may determine whether they reach their financial goals. If you’re like many investors and have difficulty staying disciplined through market volatility, you may benefit from working with a financial adviser who understands your long-term goals and objectives.
Even the most experienced investors can make poorly-timed and harmful trades in their portfolios. For example, abandoning a measured and long-term strategy to focus on particular equities performing well in the short-term can prove myopic and may ultimately come at the expense of accomplishing longer-term objectives.
Even well-performing markets are subject to volatility, and uninterrupted rising markets are rare in the long-term. As equity markets rise, fears and volatility along the way are common. Bull (or rising) markets often overcome many fears throughout their lifetimes—we refer to this fear phenomenon as climbing the “wall of worry.”
As certain events unfold—such as geopolitical tensions, elections or natural disasters—equities may face some short-term price swings due to mounting uncertainty. Fortunately, these types of events are often not big or bad enough to cause a full-fledged bear market— a fundamentally driven market decline of roughly 20% or more—so the important factor is having the discipline to weather the storm.
Bull markets commonly endure one or multiple equity market corrections—a phrase we characterise as sharp, fear-based market decline of roughly -10% to -20% amid a larger bull market. These corrections are usually based on psychological factors or false fears—not fundamentals—and tend to be fleeting. Corrections are common in bull market years, but many investors are still thrown by them.
Since bull market corrections are often fear-based and can start or stop for any or no reason at all, trying to time them can be a feckless exercise. Reacting emotionally to recent equity price swings may leave you trading at a loss, buying and selling stock at all the wrong times. For example, if you get worried following a sharp drop you may sell low and miss the subsequent rebound. More often than not, the best move during a correction is to simply stay invested to make sure you capture all bull market returns. Similarly, if you buy a particular security or asset class following a period of recent outperformance, you could find yourself overpaying for it just in time for that stock to fall back to earth. Investment management is often a long-term practice, and investor discipline, more often than not, trumps timing.
It is difficult to stay disciplined in a volatile global economy. Investors are humans and have a tendency to experience the pain of loss more acutely than the benefit of gains. This feeling can lead to rash and emotional short-term decision making. Fisher Investments Canada is committed to educating investors to guard against this behaviour, so you have a better chance of staying disciplined and on track towards your long-term goals.