Market volatility and how to handle it

Market volatility during the Russia and Ukraine conflict

During periods of uncertainty, like today, when Russia's military actions are sparking international sanctions, the markets are reacting to the news headlines. When the future is unclear, markets and investors get nervous. This results in even greater volatility with market prices spiking up and down more frequently. When markets are highly volatile, you’re rightly concerned about what effect this will have. Periods of greater uncertainty make it more challenging to know what actions to take.

What is market volatility?

Market volatility is a period when the price of an asset, like a stock or a bond, rises or falls in sudden, large, and unpredictable ways. Most of the time the major stock markets are calm; prices gain or lose less than 1% per day. However, at other times, prices rise or fall dramatically. Few investors complain when the volatility is in the positive direction, but quick price drops are unsettling.

How to deal with market volatility

It's helpful to reframe volatility as an opportunity, not a risk factor. Unlike stable assets like cash or guaranteed investment certificates, ($100 today will still be $100 next week), other assets (stocks, bonds, real estate, commodities, etc.) always experience price variability. Though it can be stressful, there are ways to handle market volatility during the inevitable times when it occurs:

Reframe it: volatility = opportunity

Imagine you need to buy a new refrigerator and the model you want just went on sale. Would you wait until the price goes back up or take advantage of the temporary price drop? Few of us would be upset about the price drop on a major appliance purchase. It's helpful to look at short-term volatility as a long-awaited opportunity to buy something we want at a better price.

Review your financial goals

If you have a long-term financial goal, today's market volatility may not have much of an overall effect. Even for those who are closer to retirement, today's market fluctuations are likely to have less of an overall effect. That's because it's common today for retirees to maintain a diversified portfolio of stocks and bonds for many decades. Changing times are an ideal opportunity to review our goals. Having a financial plan helps us to choose the right kind of investments. If you haven't set a goal yet, sign-in to your Manulife Group Retirement account to set up a Steps Retirement Program® (Steps) goal or to use the Retirement Calculator.  

Keep calm and save on…

If you contribute regularly to your retirement savings plan, then you're using the strategy of dollar cost averaging. Contributions from your pay go toward buying fund units. When the unit prices drop due to market volatility, your money goes further because you get more units for the same amount of money. This is a benefit to you since it lowers the average price of your investments over the long term. Remember: Whether market prices rise or fall, it's not a gain or loss until you sell. 

Still unsure how to navigate? A financial advisor can help

One of the many benefits of working with a trusted financial advisor is having someone in your corner during periods of market volatility. Their guidance can give you greater peace-of-mind to stay focused on your long-term goals without getting distracted by short-term volatility.

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Market Volatility FAQs

Market volatility is usually caused by some type of uncertainty. This could come from changes in interest and inflation rates or national and global events. Market prices are mainly based on future expectations and if the future looks less predictable, higher market volatility occurs. 

Market volatility is not the same thing as market risk. Markets are naturally volatile because prices change constantly for a variety of reasons. Market volatility could be a risk if panic selling leads to a permanent loss. Market risk is the possibility of not getting the market returns you expected. There are many kinds of market risk including currency risk, interest rate risk, and equity risk, for example.  

The answer is: it depends. Markets are always at least moderately volatile, and occasionally they become highly volatile. Some investors patiently wait for prices to drop to buy at a lower cost. Despite the lower cost, people don't enjoy high market volatility because the rapid and large price changes can be emotionally unsettling, especially when markets are falling. 

Keeping your saving plans on track can mean benefiting from dollar cost averaging over the long term because investing dollars go further when prices are lower. It's important to have a financial plan that includes strategies for handling periods of market volatility, such as an emergency fund. It's important to remember that while prices rise and fall, a permanent gain or loss only happens when the investment is sold.

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