Fiduciary Financial Advisor
September 15th, 2020
Don't Fear Market Dips: Why Volatility is Your Friend
If you are like most people, the word"volatility" causes a certain degree of anxiety. After all, when itcomes to investing, volatility is often seen as a bad thing. But what if wetold you market dips can be your friend? That's right – understanding andmaking use of volatility in the market can actually lead to higher long-termreturns and improved diversification of your portfolio.
In this blog post, we'll discuss whyvolatility is actually something to be embraced rather than feared and providesome strategies for taking advantage of market dips so you can make the mostout of your investments.
And if you are in need of a financial advisor in Charleston, SC, justsearch "investment advisor near me". TwentyFifty Capital is sure to pop up. While we are headquartered inCharleston, SC, we do work with clients across the country.
Ok, onto the guide!
Understanding Market Volatility
Market volatility measures how much theprice of a security, commodity, or currency fluctuates from an average priceover a certain period of time. It is typically expressed as a standarddeviation. The standard deviation can then be used to estimate the pricechanges to expect over a comparable period of time. Thus, serves as anindicator of risk - the bigger the fluctuations in price, the higher the degreeof risk to an investor.
Volatility is common in the stock marketand is to be expected. Periods of excess volatility may be caused by factorssuch as economic data releases or geopolitical events. It can also be affectedby news related to specific companies, shifts in investor sentiment, ortechnical indicators in the market.
Understanding market volatility is essentialfor investors as it can have a major positive impact on long-term investmentreturns.
The Benefits of Investing DuringDownturns
When the stock market is enduring periods ofexcess volatility, it can seem like a risky time to invest. However, investingduring market downturns can improve your long-term returns thus your financialfuture. Let’s look at some key benefits in more detail:
Higher Potential for Long-TermReturns
The market is going to move in a correlatedfashion to the economy. During times of economic boom, the market generallydoes well, and, vice versa during times of economic gloom. For those with theability to invest during a downturn in the market, investors have anopportunity to purchase them at a lower valuation.
This is where working with a Certified FinancialPlanner during these periods is extremely valuable. Working together, you cannot only identify areas of the market to invest in, but also calculate from acash flow projection how much you are able to invest for the amount of timerequired for that investment. Some investments may require much longer holdperiods than others, thus establishing this timeline with your CertifiedFinancial Planner is very important.
Lower Entry Prices for Stocks
Conversely, when markets are stable or risingsteadily over time (i.e., no significant periods of excess volatility), investors with smaller budgets can have ahard time purchasing individual shares of a company. (Keep in mind, mutualfunds and ETFs are great options!) During times of volatility, investors withsmaller budgets will have access to more individual stocks. Again, this isanother example where it is important to work with a Certified FinancialPlanner to establish your ability to invest, your timeline for doing so, and toensure you are creating a properly diversified portfolio.
The Value of Diversification in aPortfolio
During periods of market turbulence, smartinvestors will truly realize the benefits of maintaining diversifiedportfolios. By staying diversified, individuals can lessen the risks associatedwith investing in a concentrated individual stock position or sector.
During downturns, they will see firsthand howsectors within the market have a negative correlation and thus outperform (orunderperform!) the overall market.
Strategies for Investing DuringMarket Dips
Now that we have discussed why investingduring market downturns can be beneficial let’s look at two specific strategiesinvestors can use when attempting to take advantage: dollar-cost averaging andvalue investing:
Dollar-cost averaging involves buying smallamounts of securities regularly over time regardless of whether prices aregoing up or down during any given period (i.e., no timing involved).
By regularly investing in various markets, bothduring highs and lows, investors can build their portfolios while mitigatingthe risk of trying to “time” the market and end up buying at a multi-year high.
This approach enables you to acquiresecurities without spending large amounts upfront, it removes the emotionalaspect of trying to time the market, and has shown evidence of higher long-termreturns than the investor who did try to time the market.
Value investing involves looking forsecurities trading at prices below their estimated fair market value. Generally, it is believed the company isundervalued due to external market forces (such as political events) orunfounded negative investor sentiment of the company and that the company fundamentalsremain strong despite current market conditions. Investors can capitalize onthe potential upside once conditions become more stable and the market fairlyvalues the business.
Just because markets are experiencing elevatedperiods of volatility does not mean investors need to sit on the sidelines. Bytaking advantage of strategies such as dollar-cost averaging and valueinvesting, investors can take wise steps towards protecting their portfolioswhile also having the potential for larger returns should markets recover from theircurrent lows.
Ultimately, it is important to remember thatwhile market downturns may present short-term risks, they also presentlong-term opportunities for investors who are willing to make long-termcalculated decisions.
It is no wonder so many people are searchingGoogle for "financial advisors near me". By working with a financialadvisor, they can get advice and assistance when it comes to taking advantageof market downturns.
You can do so too! Schedulea free consult with Twenty Fifty Capital today to discuss how youcan best invest during market downturns. We are here to help you make the mostout of whatever circumstances the markets bring your way!