fbpx
U

What You Can Learn from Volatility in the Markets

May 13, 2016

Learn From Volatility

If you’ve watched business news or read any financial publications lately, you’ve probably heard a lot about market volatility. Defined simply as the day-to-day stock market swings, the topic is almost single-handedly responsible for most of the panic-inducing financial headlines produced by the media.

Many investors feel anxiety at the mere mention of the word volatility because it has the potential to threaten something that they value most: their money. But even as unsettling as a steep decline in the stock market can be, there are several key takeaways that could positively affect your long-term financial health.

Here are a few lessons that you can learn from volatility in the markets.

Volatility Is Normal

As much as the media tries to make it appear that market volatility is currently at it’s worst and climbing.. it’s not!

In fact, it’s widely understood that one of the most difficult aspects of investing in the stock market is the risk/reward trade-off that is required to realize higher returns. And although high volatility can cause concern for investors because of the inherent risk involved, it is the nature of markets to have both gains and losses in the short term.

Consider the uncertainty that was present in the market at the beginning of 2016. This is just one example of the many emotional ups and downs that the stock market takes us on from time to time.

While volatility is inevitable and there’s little that can be done to prevent it, it’s important to understand the cycle and learn to react rationally in order to meet your long-term financial goals.

Recognize Your Blind Spots

Making important financial decisions can be overwhelming, and in some cases, downright terrifying. For some, it’s conscious avoidance. In others, unintentional self-sabotage.

But no matter the underlying reason, avoiding certain aspects of your finances altogether can halt your efforts to make progress with your money.

This is why it is important to recognize your financial blind spots. To risk stating the very obvious, blind spots by nature they are difficult to observe. But don’t worry, this is nothing that a little introspective reflection can’t help.

The key to success in this assessment is to be objective and search out the aspects of your financial life that you may have neglected. And although it’s easier said than done, pinpointing your blind spots is the only way you will be able to effectively move past them.

In many cases, the expert opinion of a trusted financial planner can help identify any major areas of weakness and assist in designing a strategy to fill in the gaps.

The Importance of Perseverance

Staying the course doesn’t have quite same sizzle as actively moving in and out of the market, but it is likely the best thing to do in a volatile environment. In fact, market volatility is the primary reason that many investors engage in bad financial behaviors — specifically buying high and selling low.

Keep in mind that volatility and market fluctuations are much different than a realized loss. A temporary drop in value doesn’t present a huge problem if the investor is able to persevere.

For this reason, investors with a long-term perspective rarely show concern over volatility. They understand that a permanent loss does not occur unless they cave to the emotional pressure and sell during a downturn. Simply put, don’t allow market movement to deter you from remaining steadfast in the application of your financial strategy.

Diversification Is Key

Diversifying your investment portfolio is one of the best strategies to reduce the impact of market volatility. Although diversification does not eliminate the possibility of losses in the market, it has the potential to manage your overall risk.

Because asset classes vary in performance depending on market conditions, a decline in one type of asset is typically offset by a gain in another.

Think about the most recent financial crisis of 2008. Between the early part of the downturn in 2007 through 2009, the S&P 500 lost upwards of 55%. As you can imagine, more aggressive portfolios lost far more than that while properly diversified portfolios, overall, fared slightly better.

Now this isn’t to say that investors should completely ignore all financial news in favor of a set-it-and-forget-it diversification approach. That is a far too simplistic of a route to take. Although a significant amount of the doom and gloom rhetoric from the financial media is ratings driven, turbulence in the markets should serve as a reminder to periodically review your long-term plans and make sure that they are still on track.

Remember: the only time to adjust your portfolio is when your financial goals change, not the headlines.

In the end, the market can be a harsh teacher if we overreact to every fluctuation. But if we really pay attention and stick to our strategy, there are some valuable lessons to learn.

Most Recent Episodes

Financial Hacks and Habits of the Top 1% (By Age)

ho wouldn’t want to have a high enough income and net worth to be considered part of the top 1%? In this episode, we’ll tell you exactly how much you need to be considered part of the top 1% - and the habits and hacks those in the top 1% used to get there.   In this...

How to Win With Money in 2023!

Financial resolutions are always near the top of the list of Americans’ most popular New Year’s resolutions. Whether you want to save and invest more, pay off debt, or have other financial goals, we will give you the tools you need to win with money in 2023.   In this...

TikToks That INFURIATE Financial Advisors

The most powerful time to get serious about building wealth is when you’re young. So, what is the younger generation learning? Financial Advice (good and bad) is being produced in massive rates across online platforms and TikTok is the new frontier. Is there good...

5 Levels of Wealth AND How to Achieve Them! (2023 Edition)

We believe there are five distinct levels of wealth, but they aren’t solely dependent on income or net worth. We’ll walk you through each of the five levels - including how to know where you are at, how to advance to the next level, and signs you are doing it right.  ...

Average Net Worth By Age in 2023!

It’s time for one of our most anticipated shows of the year: our annual Net Worth By Age show! In this year’s edition, we’ll shared updated numbers and data for 2023 and discuss the most important things for you to focus on in each decade.   In this episode, you'll...

Win Financially During a Recession! (Everything You Need to Know)

The bear market we've experienced in 2022 has been longer than many in recent memory - and some are concerned that the economy may soon enter into a recession. Here's everything you need to know to stay on-track and win financially during a recession!   In this...

The Fed Just BROKE the Car Market! (What You Need to Know)

Car prices have been on a rollercoaster ride the last few years, and it looks like they might finally be coming down. In this episode, we’ll discuss what you need to know about the current car market, pitfalls of buying a car, and how to do it the right way.   In this...

Top 4 Money Mistakes People Make During the Holidays!

There’s a reason why financial resolutions are always near the top of the list in January - many Americans spend the holiday season making financial mistakes. In this episode, we’ll discuss the top money mistakes people make during the holidays and how to avoid them....

Financial Advisors Share What They WISH They Knew About Money Earlier!

Have you ever felt like if you just knew this one thing about money earlier your finances would be in a better spot? In this episode, we’ll share the five biggest things we wish we knew about money earlier!   In this episode, you'll learn: What we wish we knew earlier...