The stock market is more visible than ever.
Real-time reactions to news, geopolitical events, and policy changes are driving prices and trends; the rise of retail trading platforms like Robinhood are amplifying movement in the stock market.
As a result, volatility in the market is front of mind in the investing world, and this attention has shifted the narrative from focusing solely on returns to emphasizing risk management. This creates a new challenge—and opportunity—for both seasoned investors and newcomers.
The key question is, how do we handle volatility?
As I’ve mentioned in previous blogs, proper diversification of your portfolio assets is the best defense.
When volatility strikes a sector of the market, the instinct is to sell the position and get rid of something that isn’t performing. But this strategy can lock in losses. However, a diversified portfolio lets other sectors, such as energy, help carry the load while another sector, perhaps tech, is experiencing instability.
The Miriam-Webster Dictionary defines volatility as a tendency to change quickly and unpredictably. This can be unnerving.
But movement in a stock is a two-way street. Just as quickly as it falls, it can rise and show gains. Diversification allows us to have the opportunity to catch the rebound when prices return.
As Warren Buffet puts it, “The true investor welcomes volatility… a wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses.”
Another common question is: When should we invest during volatility?
While trying to time the market is tempting, the much sounder strategy is to dollar-cost average. Dollar-cost averaging involves investing a fixed amount of money into the market at regular intervals, regardless of asset prices.
By committing to this disciplined approach and breaking up the purchase over time, investors buy more shares when prices are low and fewer when prices are high, which averages their cost over time. This strategy reduces the emotional temptation of trying to time the market during periods of uncertainty and provides a sense of stability during volatile times. For long-term investors, particularly those building wealth gradually, dollar-cost averaging offers a practical way to stay invested and benefit from market recovery when prices rebound.
“Volatility is the price of admission” according to Morgan Housel in The Psychology of Money.
Housel is saying that to access the potential for high long-term returns in the market, you must accept and endure short-term fluctuations and volatility.
I believe in this philosophy. Seeing volatility as a likely occurrence and implementing strategies such as diversification and dollar-cost averaging position you to succeed when market fluctuations occur.
To discuss market volatility, or other topics, reach out to us at Rea Wealth Management. We’re happy to assist you with your investing journey and look forward to working together.
Max W. Feller
Financial Advisor
This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation. Diversification does not assure a profit or protect against loss in declining markets and cannot guarantee that any objective or goal will be achieved. Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results.
Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a Registered Investment Adviser. Additional advisory services offered by Rea Wealth Management, a Registered Investment Adviser, and fixed insurance products and services are separate and unrelated to Commonwealth.