Stock market volatility describes the degree to which a stock or an index price fluctuates over time. Higher volatility typically indicates greater uncertainty and risk, while lower levels indicate more stable markets.
A number of different factors can cause stock market turbulence, including economic trends, company developments, and investor sentiment. Understanding the drivers of volatility can help you make informed investing decisions and implement effective portfolio management strategies.
Systematic Risk: This type of risk affects the entire market or a broad segment of it. Factors like economic conditions, geopolitical events, interest rates, and systemic financial crises contribute to systematic risk. Markets often become more volatile during periods of heightened systemic risk.
Unsystematic Risk: This type of risk affects individual assets or companies. Factors like competitive dynamics, management decisions, and regulatory changes contribute to unsystematic risk. Diversification can reduce but not eliminate unsystematic risk.
Investing during times of volatility can be difficult for some investors, who may sell investments out of fear or overreact to a market correction or crash. However, over the long term, stocks tend to recover from a correction or crash and continue rising. Moreover, taking advantage of the opportunity to buy stocks at reduced prices through dollar-cost averaging can increase long-term returns.
Investing in a well-diversified mix of asset classes can help you better weather stock market turbulence and long-term gains. When you’re in your 20s, for example, a portfolio that’s 80% to 100% stocks may be appropriate—though as you near retirement, it might be wise to include more bonds in your mix.