You may have heard the word ‘volatility’ when referring to investments. When an investment, or market, is volatile, it means that there are great fluctuations and market disruptions. You may look at your investment one day, and it could be up by 20%, the next it may have dropped to -5%. Usually, if you hold your investment long-term, it will weather the short-term volatility, meaning that all of these ups and downs don’t matter too much, because your investment will have grown overall. A volatile investment can be a stressful one if you haven’t taken emotion out of investing. It’s always best to remember your investment goals, understand that investments work well long-term, and understand that the market will bounce back. If you haven’t read my article on ‘How To Take Emotion Out Of Investing’, you can read it here:

https://danielleteboul.com/2021/05/27/how-to-take-emotion-out-of-investing/: Is Volatility A Good Thing?

Whilst volatility is inevitable- and investments with low fluctuations are generally more conservative and may not bring as high returns- is it a good thing for us as investors? Is the possible stress of a roller-coaster market worth it? What if I invest a lump sum at the wrong time? In this article, I will deep-dive into the question…is volatility a good thing?

No-one can successfully time the market correctly every single time, especially a novice investor who has a full time job and other responsibilities, meaning they can’t sit and watch the stock market all day. Therefore, I think it’s key to remember, ‘time in the market, versus timing the market’; drip feeding smaller amounts of money over regular intervals over the long term, can often mitigate the risk of volatility. This concept of ‘dollar-cost averaging’ is a very simple yet important strategy to remember. So long as you stay the same with your investments and don’t fluctuate on your stance, you can weather the ups and downs of the market.

As I hinted to earlier, an investment that barely fluctuates, is often more conservative in its risk profile, meaning that there may be lower risk of losses, but also the returns may not be high. On the flip side, a well chosen investment that fluctuates, may mean that your investment is volatile, but on the whole rises faster. So ask yourself, would you rather have little fluctuations in your investment and possibly never reach a decent rate of return, or would you be OK with taking the risk on the volatile investment in order to access to possible higher returns?

For those that are a bit more savvy, they may be keen to buy more at a dip in the market. Although timing the market is very difficult, sometimes the market will be down for a longer period of time. For example, the dot come bubble started collapsing in 1999 and didn’t end until 2002. Can you imagine how happy you would be if you had bought Apple or Microsoft stocks during this period, when the world was losing faith in new technology, and you had held onto those stocks until now? This is a brilliant example of being a market opportunist, whilst still having long-term investment goals. This is an extreme example, but the idea still stands. If the down period of the market has been continuous for quite some time, it’s best not to hesitate. If you have the capacity to invest more, do so before the market goes up, and reap the benefits in the future.

If you are struggling with emotionally dealing with market volatility, you may want to consider a hands off approach and engaging professionals to do the work for you. Fund managers will be able to understand the peaks and troughs of the funds, making well-informed and educated decisions on how to rebalance your portfolio. One of the strategies they will take will be diversification, essentially not having all your eggs in one basket. If you have a portfolio of a wide-range of investments in different asset classes and geographical locations, you mitigate the risk of losing it all if something goes wrong.

For example, imagine two people have invested in the Brazilian stock market; Person A has invested 80% of their portfolio, whilst Person B has only invested 5%, whilst having a basket of stocks in other areas. Now imagine that Brazil goes into political unrest, a military coup is held, and the new leader is isolationist…the Brazilian stock market busts! Oh no! Person A has lost 80% of their investment, and who knows how much it could drop, and maybe keep dropping! Whereas Person B has only lost 5% of his portfolio. Yes, this is annoying, but not as catastrophic as Person A’s situation. And who knows, Person B may have benefited in other areas. Maybe because of the situation in Brazil, the country no longer exports raw sugar, and this causes India’s raw sugar exports to go up. This is great news for Person B, because they have also invested in Indian funds, that have benefitted from the Brazilian coup!

Whilst volatility often holds negative connotations, it is dangerous to think of it in this way. Volatility can work to our advantage, and be beneficial for us, so long as we stick to certain investment principles, such as dollar-cost averaging, taking the emotion out of investing and diversification. Not only that, if we are opportunistic about our lump sum investing, this could massively benefit us long term. As always, the key is that long-term investment strategies will be able to survive short-term market fluctuations. Here is an excellent diagram I found to demonstrate this. I hope you found this article useful, and if you did have any more questions on this topic, I would be happy to answer.

This chart shows the span between the largest average 1-year, 5-year, 10-year, and 20-year gains and losses among three key market indexes for the period 1926–2009. As you can see, short-term holdings (especially in stocks) are extremely volatile. Historically, a long-term approach has provided a much smoother ride.