How financial market volatility affects investments

Understanding Volatility

Volatility refers to the degree in the performance of an investment or market fluctuations over a period. Rapid fluctuations in a market means it is highly volatile and this indicates the market is not stable. These fluctuations are because of interest rates, inflation, economic conditions, industry changes, national and global events. Market volatility is usually associated with investment risks as highly volatile investments could be riskier. Understanding this gives you an idea of the market’s stability and this helps you make wise investment decisions.

How Volatility Affects Investments

Your investments could experience periods of volatility, and this would affect your returns. High levels of volatility in a market could potentially lead to high profits or losses. High levels of volatility of short-term securities could have a negative impact on the returns and possibly resulting in a loss.  For long-term investments like equities, the impact of volatility is greater in the short-run as it could lead to significant losses but eventually balance in the long-run. Therefore, investors are advised not to panic when a stock becomes more volatile as it could lead to increased stock prices in the future.

How to minimize the effects of volatility

There is always an expected level of volatility in the financial market, therefore it is important for investors to understand volatility because it prepares you to take appropriate steps to minimize losses on your portfolio.

Investing in a diversified portfolio is a good way to mitigate the risks associated with market volatility. This is because the impact of a decline of an asset on your portfolio will be reduced as the other investments can help offset the loss.  

Investors with a moderate to high-risk appetite who still want to protect their investments should consider mutual funds in contrast to directly investing in individual assets. As these (stocks, bonds, etc.) funds help mitigate volatility through diversification of assets and professional management.

You can visit our website https://www.axamansard.com/investments/ to learn more about our mutual funds. You can also send an email to clientservices@axamansard.com to consult a qualified portfolio manager who can help develop investment strategies to mitigate market volatility risks.