Market volatility can feel like a roller coaster ride—thrilling when the markets rise, nerve-wracking when they fall. It’s important to understand this uncertainty, so you can plan accordingly and make wise decisions that help you reach your financial goals.
Volatility refers to the size and frequency of price changes for individual stocks or market indices. Shares of companies with stable growth tend to have low volatility. On the other hand, companies that are heavily involved in developing new products and services may have high volatility. For example, the biotech company Amgen (AMGN) has a strong market presence in cancer drugs and genetic testing but has also invested significant resources into researching and developing new life-saving treatments. As a result, its stock has higher volatility than many other pharmaceuticals.
Disappointing economic developments can also lead to higher market volatility. For instance, rising inflation can trigger a rise in interest rates, which can shake investor confidence and cause stocks to fluctuate. Moreover, political events, such as war or terrorist attacks, can also cause market jitters.
Investing in sectors with stable earnings and cash flows, such as utilities or healthcare, can provide some stability during periods of market volatility. In addition, implementing an investment strategy such as dollar cost averaging (DCA) can enable you to buy more shares when prices are low and fewer when they’re high. This can lower your average share price over time, helping improve your returns when the market rebounds.
About the Author
