There are so many things going on right now that affect the stock market. There is the worldwide outbreak of Covid-19 that’s creating ripple effects throughout the economy. The virus has killed many throughout the world and is bringing the economy to a halt in Europe and the U.S.
There are likely to be increased claims for unemployment and other government programs in the coming months, and small businesses are looking at how they can stay afloat.
Employees are trying to figure out what they’ll do if they’re laid off work, and it’s a worrying time.
If you invest in the stock market, watching the wild swings each day can be troubling, to say the least, but there are things to keep in mind during volatility no matter how much you have in the market.
Volatility is actually a statistical concept that shows the tendency of a security or the market as a whole to make big rises or falls in a brief time period. It’s based on the standard deviation of your returns.
When there’s volatility, there are big swings in prices paired with a lot of trade activity and volatility usually stems from an imbalance in how many orders are going in one direction. An example might be when there are more buy orders than sale orders.
Volatility can be driven by external forces, but there is also some evidence volatility is linked to things like day trading and short-selling.
Volatility and Risk
Volatility and risk are two concepts that are related, but not the same.
Volatility is a term that refers to the extreme swings in the market we’ve been seeing in the past few weeks, but risk is the likelihood that you lose some or all of your principal investment. When market volatility is up, then it can also raise the potential for loss, but increase the potential for a profit.
When there is a lot of volatility for whatever reason, that means there’s high frequency in trading. That can mean positions are held for shorter times and when the market is experiencing volatility, it’s often incredibly sensitive to the news and the news cycle.
Volatility is Normal
While volatility can feel anything but normal, investors need to realize and accept that it is normal. Volatility is a critical part of the stock market, and the market will react to different things in the world.
The level of volatility can vary depending on the situation, but the existence of volatility itself shouldn’t be something you view as abnormal.
Corrections are something that, as a long-term investor you will have to come to terms with, if not now, eventually.
Stick to Your Plan
When you become an investor, you shouldn’t go into it blindly. You should have a long-term plan, and you should make decisions based on your objectives throughout your lifetime.
If you have a plan as you become an investor, then you should stay the course and not be swayed by ups and downs in the market.
If you’re worried about whether or not you have the stomach to stick to your plan, then you need to stay away from watching the market or your account on a daily basis.
There’s a very big chance that you could see 50% of your retirement account wiped out if there’s a bear market, so keep yourself away from it.
Monitor Fundamentals
What’s important for people who follow a buy-and-hold strategy to know is that this strategy doesn’t mean that you simply buy something, leave your money there and never think about it again.
Yes, you should ignore externally-driven swings, but you also need to make sure you’re investing based on fundamentals.
Long-term investors need to make sure their portfolio is made up of companies with consistent earnings and a solid balance sheet so that then even if there are swings, it doesn’t put the long-term value of the company in jeopardy.
If you identify companies with strong fundamentals, you can use downswings as a buying opportunity.
Have a Stash of Cash
While cash isn’t going to earn you much on the return side, if you do have some cash set aside in addition to your investments, it can make it mentally easier to weather the storm.
If you add your online savings account to your trading account and you see an opportunity to buy, then you can easily do that as well.
Invest in High-Dividend Stocks
If there’s a lot of volatility and you’re concerned, one strategy to consider might be adding some high-dividend stocks to your portfolio because they can give you a bit of cushion.
When you’re earning dividends, even if there are losses on the price of the stock itself, you’re still getting that income from the dividend to shield you from the blow a bit.
When there is income, it can, at the same time, help with price stabilization.
It’s typically a good idea to have some high-dividend-paying stocks in your portfolio regardless of what the market as a whole is doing.
Value Stocks
Value stocks are those stocks that are considered a bargain. They are usually undervalued, and a lot of people might be looking in the opposite direction from these stocks at times of volatility.
Some of the markers of a value stock can include a lower price-to-earnings ratio, compared to the industry standards, or a dividend yield that’s above average.
Sometimes, there may be a period of negative news that can push the prices of a value stock down, so it’s a cheap deal. It can be risky to invest in value stocks, and you’ll need to be in it for the long-haul.
Volatility is tough regardless of who you are and how much you have invested, but you have to be able to take on the volatility and perhaps even make it something that you can earn money from, rather than seeing volatility and automatically running in the opposite direction.
