Investing in a volatile market can be quite challenging as the market comes with various challenges and opportunities.
Market volatility is when a market experiences periods of unpredictable, and sometimes sharp, price movements.
What is market volatility?
Market volatility is the frequency and magnitude of price movements, up or down. The bigger and more frequent the price swings, the more volatile the market is said to be.
How is market volatility measured?
Market volatility is measured by calculating the standard deviation of the annualized returns over a given period. It shows the range to which the price of a security may increase or decrease. current volatile markets are used in the option pricing formula to gauge the fluctuations in the returns of the underlying assets. volatile market examples indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period or over a long duration.
What causes volatility?
Volatility is caused by factors such as global impacts, economic and political factors, major company earnings, and changes in interest rates amongst others, and every investor looking to invest in assets for the long term should know that volatility is normal.
Investing, especially in volatile markets, calls for a deeper understanding of the market. Wrong decisions may have ripple effects that can negatively impact an investor’s portfolios.
Here are some mistakes investors make in the volatile market;
Panic and hasty decision making
Experts advise investors not to let emotions drive their investment decisions as each phase in the market has a definite endpoint be it a sudden decline or sharp rise.
When it comes to the market, acknowledge your emotions but do not act on them instead consult with an expert or check the company’s past performance and the industry’s overlook for the next few years.
Not diversifying assets
A portfolio that is not diversified or properly diversified leaves investors vulnerable to market volatility.
The market is unpredictable, and a diversified portfolio protects investors from the unpredictable nature of assets.
An investor is expected to spread his investments so that exposure to any one type of asset is limited.
A diversified portfolio helps balance risk.
Refusing to work with an investment expert
Sometimes the volatile market can defy known concepts of technical analysis, and in most cases, it is sentiment-driven.
Then there is a need for an investment advisor who is aware of the market and can help when the markets seem volatile and directionless. Taking help from an investment advisor can be a very beneficial and important strategy for any investor.
Legendary investor Peter Lynch said that
“Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”
Chasing returns in the middle of a volatile market can permanently damage the long-term returns of a portfolio.
The major disadvantage of chasing returns is that switching your money from big losers to what is in trend can lead to selling low and buying high.
There is nothing wrong with re-allocating some of your portfolios from losing to winning positions, but it must be done with the help of an expert.
No clear investment strategy
Having a clear strategy is the most essential aspect of investing.
Investors who do not have a clear strategy find themselves making terrible decisions and following trends or replicating what other investors are doing without knowing the reason.
While creating a strategy as an investor, it is important to be able to answer these questions
- What is my investment goal?
- What is my risk appetite?
- What are my investment boundaries?
An investor’s decision should be automated and organized around safeguards and clear boundaries and not just on how to trade in volatile market.
The above steps do not guarantee you that your investments will give a zooming return but still if one follows these easy steps then their chances of making losses can be minimized. Being an investor should be a smooth and rewarding journey if these mistakes are avoided and there’s a clear strategy for investment.
At LEVELUP Consulting we have professionals who help in advising every investor on trading during volatile markets and also how to avoid these mistakes. Contact us today to get the best offers tailored to meet your investment needs.