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A detailed guide to volatile markets—what they are, how to budget and invest in them, and more
These days, we're reading a lot about choppy markets, currency swings, interest rate changes, macro economic trends and cryptocurrencies rising and falling.
None of these events happen in isolation. What happens in the world finds its way into the markets. As a result, we’ve felt the ripples of all this mayhem in our portfolios, and it’s no doubt left many of us dizzied as we try to handle all this new stress and volatility.
Stick with us! We’re here to help you navigate volatile markets. (Psst, pop into the app to check in on your investment strategy. It’ll only take 3 minutes to get up to speed!)
Defining volatility
There are a lot of ways to observe volatility. As it relates to investing, we’re referring to volatility as a rapid, abrupt change of direction in equities, bonds, index funds, and any investment vehicle out there.
Over the short term, the market isn’t prone to violent movements. Data from 1999 to 2019 tells us that, on any given day, the S&P 500 moves more than 2% in either direction (because volatility means both ups and downs) only about 20% of the time, and more than 3% in either direction only 10% of the time.
It’s historically uncommon, but swings of 2-3% or more have become increasingly normal across all public markets, including already volatile ones like crypto.
We can observe volatility plainly, meaning it’s hard to miss even without any statistical measurements. Basically, when you see the market or an individual stock move drastically in a short period of time, you know that’s volatility at work. There are also a handful of ways to measure it formally, too.
Measuring volatility
The most popular instrument is the VIX index, which is a volatility index that measures just how choppy markets are. More specifically, the VIX tracks the S&P 500 index, which is a good benchmark for overall market conditions. Without getting into the technicals, an average VIX reading might be somewhere around 20, but recently, we’ve hovered around 30+ quite often.
Elsewhere, we have beta, which tells us how a stock moves relative to the overall market. The benchmark beta for the overall market is 1.0, and if an individual position has a beta of greater than 1.0, that particular position is prone to move more than the overall market. Or, in other words, it’s more volatile than average.
There are other secondary metrics we use to measure volatility, too, such as standard deviations, maximum drawdown, true average range, and more.
So what does this all mean? Sure, we can observe volatility statistically in multiple ways with different measurements. But even without those metrics, it won’t go unnoticed. You’ll know volatility when you see it, as it’s marked by drastic swings in a short period of time like we’ve been seeing all year.
The recipe for volatility
Investing has become trendy in recent years as more individual buyers have poured into the markets. Although overall activity has declined, that interest has carried over into this bear market, and investors are now scrutinizing economic news more closely than ever, reacting swiftly to any crumbs of data they can get their hands on. In a sense, we’re micromanaging the markets.
Basically, the market sensitivity is dialed up right now. When we combine this with a long list of catalysts that have the potential to sway investor sentiment to green or red at any given time, we’ve got a recipe for volatility and sizable market swings on our hands.
We’ve no shortage of news and numbers to parse either. Any given week brings reports on inflation, sub-categories of inflation, economic data, earnings, minutes from the Fed meetings, housing numbers, and more.
How to navigate the uncertainty
Negotiating with volatility is a tough ask and it drives a hard bargain. Luckily, there are still some ways we can navigate these turbulent times, hopefully arriving safely on the other side of it all.
Planning: Having a plan makes enduring the inevitable chaos of life much easier to bear. By developing sound financial/investment plan and aligning your actions with your goals, you automatically eliminate some of the stresses that come from uncertainty. Defining your goals, risk tolerance, preferences, and time horizon are the most important elements of your agenda here, and knowing each of those will save you a load of worry. (Psst, log onto Pocketnest to get your goals and plan together—in just 3 minutes a week!)
Adapting: Part of your financial plan should have some wiggle room. Your plan is invaluable and should help you through times of volatility—but it’s not something to follow blindly. Everything, including your financial plan, needs to have space to weigh new information with your feelings, rationale, and some sound counsel. From there, you can decide whether it’s time to adapt your plan accordingly.
Diversifying: One of the pillars of good, long-term investing is to diversify because it can help cushion the blow of volatile markets. Being too heavy into a specific stock, fund, sector, or even equities as a whole can leave you more exposed to risk than a more well-balanced basket.
Most of all, patience: Time and time again we’ve seen the markets recover from all kinds of “unprecedented” historic events, bear markets, and volatility. Heck, even the “worst investor ever” would’ve made out well by just buying and holding no matter what. Sure, it’s always possible that the unthinkable happens and markets don’t end up higher in the long run, but the odds of this are infinitesimally small. With time on our side, most portfolios will come out on top.
For those retiring soon: All the financial planning and patience in the world won’t help someone that’s looking to retire right now, but can’t, because of a beaten-down portfolio. This is a tricky situation, but one you can overcome by living below your means, saving aggressively and maxing out all retirement accounts.
Setting yourself up for success
We’ve just covered all the bases on volatility, and while it’s a complicated recipe, the takeaway here is relatively simple: don’t panic during the uncertainty.
Market data and studies dating back hundreds of years have proven to us over and over again that, for most investors, time in the market is almost always superior to timing the market. Volatile times can be really scary for a portfolio, but in most cases, a combination of planning, adjusting, and patience will get us through it.
If you’re still with us after learning all about volatility, you’re already on the right track. Take the next step by popping into your To-Do List to make sure you’re staying on top of your plan.