Understanding volatility is a cornerstone of successful investing, yet it’s a concept that often intimidates investors.
Much like the troll in the story of Billy Goat Gruff, volatility can feel like an obstacle blocking your path to financial success.
But here’s the truth: volatility isn’t the enemy. It’s simply the market’s natural rhythm—its ups and downs. By understanding and managing it, you can confidently cross the bridge to your financial goals.
In this blog post, we’ll break down volatility, why it matters, and five practical strategies to manage it effectively. These insights will empower you to embrace volatility as a normal part of your investing journey.
What is Volatility?
Volatility refers to the rate and magnitude of price changes in an asset or market. It’s often seen as a measure of risk—the bigger and faster the price swings, the more volatile (and unpredictable) the asset.
While many associate volatility with the stock market due to its real-time pricing, it exists in all markets, from property to commodities.
The difference is that with tangible assets like property, price updates are less frequent, making their volatility less apparent.
For example:
Stock Market Volatility: Immediate price updates via online trading platforms showcase dramatic swings. It’s why I teach people not to look at the market every day, or in some cases even more frequently!
Property Market Volatility: Valuations are slower, making fluctuations less visible, though they exist just the same. Current property websites now provide prices indications, though they are indications only and hence less volatile.
The Volatility Index (VIX)—often called the “fear gauge”—measures market-wide volatility, providing insight into whether the market is experiencing rapid swings (high volatility) or steadier changes (low volatility).
Why Understanding Volatility Matters
Volatility isn’t inherently bad; it’s a reflection of the market’s emotions and fundamentals. Prices can fluctuate due to:
Fundamentals: Economic shifts, industry changes, or sector-specific developments.
Emotions: Fear and greed dominate short-term price movements, making the market behave like a moody old man. Just take a look at what happened in the days after the US election result!
Understanding volatility helps you:
- Avoid emotional, reactionary decisions.
- Stick to your long-term financial goals.
- Recognise that short-term fluctuations don’t dictate the ultimate success of your investments.
5 Ways to Manage Volatility
1. Diversify Your Portfolio
Diversification means spreading your investments across various asset classes, industries, and geographies. By doing this, you minimise the impact of a volatile market on your overall portfolio.
In stocks: Use index trackers (like the S&P 500 or ASX S&P200) to gain exposure to hundreds of companies, reducing the risk tied to individual stocks.
In property: Avoid putting all your investments in one type or location. Consider real estate investment trusts (REITs) for added diversity.
Pro Tip: A diversified portfolio cushions against the ups and downs of any single investment.
Adopt Asset Allocation
Asset allocation complements diversification by spreading your investments across different asset types, such as equities, real estate, bonds, and commodities.
Equities (stocks): High potential returns but more volatile.
Bonds: Provide stability during stock market downturns.
Commodities: Hedge against inflation or market crashes.
Different asset classes perform differently depending on economic cycles. By spreading your investments, you balance risk and create stability.
Practice Dollar-Cost Averaging
Dollar-cost averaging involves investing a fixed amount of money regularly, regardless of market conditions.
This disciplined approach helps you buy more shares when prices are low and fewer when prices are high, averaging your cost over time.
In rising markets, your portfolio’s value increases. In falling markets, you acquire more shares at lower prices.
Regular investing through dollar-cost averaging ensures you stay in the market, taking advantage of both highs and lows.
Focus on Quality Investments
High-quality assets weather market volatility better than speculative or lower-quality ones.
Index trackers are an excellent way to own shares in leading companies without needing to pick individual stocks.
Why Index Trackers Are Ideal:
- Automatically adjust to include top-performing companies.
- Provide built-in diversification across industries and sectors.
For example, an S&P 500 index fund gives you exposure to 500 of the largest U.S. companies. As sectors evolve (e.g., a shift to electric vehicles), the index updates, ensuring you always hold shares in top-performing businesses.
Avoid Emotional Reactions
Emotional decisions during volatile times—like selling during a dip or buying during a surge—can derail your long-term financial plan.
To counteract this:
- Focus on your long-term goals, not short-term market noise.
- Remember why you’re investing: for financial freedom and sustainable wealth.-
- Manage what’s in your control (your emotions), not what isn’t (market movements).
Volatility is temporary; disciplined investing lasts a lifetime.
Volatility: A Gateway, Not a Barrier
The biggest mistake investors make is sitting on the sidelines during volatile periods. Fear of volatility often leads to inaction, which is riskier than staying invested. Assets that aren’t working for you can’t help you grow wealth.
Instead, remind yourself:
- Volatility is normal.
- It reflects the market’s mood swings, not its long-term direction.
- With the right strategies, you can navigate it confidently.
Conclusion
Volatility isn’t your enemy—it’s a normal and even useful part of the investing landscape. By diversifying your portfolio, practicing regular investing, focusing on quality, and managing your emotions, you can embrace volatility and use it to your advantage.
Remember, your investments are tools to create financial freedom and a rich, fulfilling life.
Lead your money with confidence, and it will work for you, even during volatile times.
What’s Your Plan? Now that you understand volatility, which of these five strategies will you apply to your portfolio? Share your thoughts in the comments. Let’s embrace volatility together and build wealth for the life we desire.
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