Stock Market Volatility: How to Survive

Posted: Updated:

Recently the stock market experienced steep declines tempered with rebounds. Investors were left reeling from this sudden volatility. But what exactly is volatility? What caused it to occur? And what can you do to help protect your investments?

It's been just over one year since the Dow Jones approached 20,000 points. At that time we were all wondering if it had hit its peak or if it would keep rising. It was the latter, as week after week U.S. markets seemed to hit new record highs, while volatility remained near record lows. As this pattern persisted, it was easy to become complacent.  But all that changed in February when volatility hit the market.

What is Volatility?

When referring to the stock market, volatility is essentially the ability for market prices to change rapidly and unpredictably. Volatility is often measured by the VIX, which you've probably heard about in the news lately. The VIX, first introduced in 1993, is the symbol for the Chicago Board Options Exchange’s volatility index. It's widely used as a measure of market risk.

How does it work? The VIX calculates risk by taking the price of options on Standard & Poor's 500 Index (a leading indicator of U.S. equities) and estimating how volatile those options will be (i.e. how much their prices will fluctuate) between now and their expiration dates. The historical average of the VIX is around 19. To put this into perspective, 9.14 is the VIX’s lowest close. That occurred November 3, 2017. The first week of February 2018, the VIX jumped to over 37!

Although market volatility can make you, as an investor, uneasy, it’s a normal part of the investment cycle. On average, a 5 percent adjustment to the market occurs about every 7.2 months and a 10 percent correction occurs about once every 26.1 months. So, don't make any rash investment decisions!

What's Caused The Recent Volatility?

Many experts have speculated about the causes of the recent spike in volatility. Some point to concerns about inflation increasing faster than expected. This puts pressure on the Federal Reserve to raise interest rates at a more rapid pace.

In turn, the increase in interest rates causes U.S. bond yields to rise. This could become a catalyst for some investors to sell stocks and put their money in the more attractive bond market, driving the stock market lower. In fact, this process has already begun. The U.S. 10-year Treasury yield has more than doubled from its July 2016 low of 1.3 percent to a four-year high of 2.9 percent on February 12, 2018.  Higher interest rates also increase the odds of an economic slowdown, which is bad for the stock market.

But other factors play into the volatility we've recently experienced. One is the scare surrounding the potential government shutdown. Another is investment strategies. Some trading tactics involve computer algorithms that trigger buying or selling during times of sharp moves up or down in the market, amplifying the volatility.

What You Can Do?

If you are a long-term investor, the best strategy is to stay calm and stick to your plan. Trying to determine the timing of the market highs and lows can be detrimental to your portfolio. Times like these are a good reminder for both short-term and long-term investors to review their accounts’ risk tolerance and allocation.

Whether the stock market is volatile or remains steady, changing personal circumstances may influence your strategy. Several years ago you may have set up an aggressive plan that takes on higher risk. And that plan likely served you well. But now, maybe you’re buying a new home, expecting a child or nearing retirement. Your risk tolerance in these situations is not going to be as high as it was previously. Once you’ve evaluated your current risk tolerance, assess your portfolio’s allocation to ensure you have the proper exposure.

Summary

If you’re an investor, volatility can be a painful thing to experience. But volatility is a normal part of investing. Markets will drop from time to time, but if you have constructed a well-diversified portfolio and have a concrete financial plan, you can ignore the fear-based chatter and focus on your long-term goals.

Austin Stagman is an Investment Analyst with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Austin.

  • Perspectives

    • Truck Driver Supply Impacting Cargo Hauling Demand

      The U.S. unemployment rate has moved down to 3.9 percent, which is its lowest level since December 2000, according to the U.S. Bureau of Labor Statistics. Great news! Maybe not. There are business sectors that need employees due to constraints in the labor market - namely truck drivers. The level of employment in the truck transportation industry is essentially unchanged since mid-2015, according to the bureau. And the impact is being felt.

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • Triple XXX Root Beer Appears in Prime Time

      A soft drink that carries the name of an iconic West Lafayette restaurant has been featured on a national television series. In a message on the Triple XXX Family Restaurant's Instagram page, co-owner Carrie Ehresman said the recent appearance of Triple XXX Root Beer on NBC's "Chicago Fire" was not product placement. She said the show's producers reached out through the restaurant's website and "we weren't sure we'd make the final cut until it aired!"

    • Truck Driver Supply Impacting Cargo Hauling Demand

      The U.S. unemployment rate has moved down to 3.9 percent, which is its lowest level since December 2000, according to the U.S. Bureau of Labor Statistics. Great news! Maybe not. There are business sectors that need employees due to constraints in the labor market - namely truck drivers. The level of employment in the truck transportation industry is essentially unchanged since mid-2015, according to the bureau. And the impact is being felt.

    • Mark Sandy became Ball State's director of intercollegiate athletics in 2015.

      Ball State to Introduce Next AD

      Ball State University Monday will name a new director of intercollegiate athletics. Mark Sandy, who has served in the position for more than three years, announced his retirement in January. During Sandy's tenure, eight teams won Mid-American Conference league championships or division titles. Three new facilities projects have been completed during his time in Muncie...

    • The Impact of Technology on Economic Development Policy

      In a world where technology is enabling almost everything, economic development policy makers are faced with several challenges when planning and implementing strategies for economic growth. Communities, regions and states must be able to adapt programs and initiatives to address the economic disruption caused by technology. In particular, investments in tech and talent are vital to ensuring economic growth and wealth creation for residents and businesses throughout the world.

    • City of Fort Wayne Promotes Joyner to Director

      Cindy Joyner has been promoted to director of Fort Wayne's Community Development Division. She has served as deputy director of the division for the past 10 years. Joyner oversaw the Neighborhood Code Compliance Department and helped to enhance customer service and community outreach. She has worked for the city of Fort Wayne since 2002.