Investors are often spooked by market volatility, with recent events like the 1,000-point drop in the Dow Jones Industrial Average on August 5, serving as a stark reminder of the stock market’s inherent unpredictability.
When headlines are filled with dramatic losses and tales of impending market crashes, it’s easy to see why some investors might feel the urge to flee to safer ground.
But savvy investors, especially those working with a financial advisor, understand that volatility is not only inevitable but can also be harnessed to achieve long-term success.
The VIX and beyond
The fear of volatility is largely driven by a misunderstanding of what it truly represents. Volatility, as measured by the Chicago Board Options Exchange (Cboe) Volatility Index (VIX), is often referred to as the market’s ‘fear gauge.’
On August 5, the VIX hit a peak of 65.73 – a level not seen since the pandemic-induced stock market crash of 2020. The VIX reflects investor expectations of volatility over the next 30 days, and while a spike in the VIX can certainly signal increased uncertainty, it’s important to recognize that volatility is a natural part of market dynamics.
For example, after reaching that extreme high, the VIX settled at 38.57 by the end of the trading day. Over the next few days, the US stock market recovered, illustrating how volatility can be temporary and not necessarily indicative of a long-term market downturn.
In fact, for those who understand market cycles, these periods of turbulence typically present opportunities rather than threats.
The case for embracing volatility
Market volatility often opens the door to buying opportunities. When prices fluctuate dramatically, assets that were previously overvalued may become available at a discount.
For long-term investors, these market corrections provide opportunities to buy quality stocks at lower prices, potentially leading to significant gains when the market stabilizes and prices rise again.
Consider the aftermath of the August 5 selloff: as panic subsided and the VIX stabilized, the market rebounded.
Investors who maintained their positions or strategically increased their holdings during the downturn likely benefited from the recovery.
Historical data shows that downturns are often followed by periods of growth, and those who remain invested during volatile times often reap the rewards.
Volatility is inevitable — and manageable
Volatility is an inherent part of investing. Markets will always experience periods of uncertainty, whether due to economic data, geopolitical events, or other factors. However, understanding this and planning for it can help investors avoid knee-jerk reactions to short-term market swings.
A financial advisor can play a critical role in managing this volatility. By developing a well-diversified portfolio that aligns with an investor’s risk tolerance and financial goals, an advisor can help mitigate the impact of short-term fluctuations.
Diversification across different asset classes, sectors, and geographies ensures that not all of an investor’s capital is tied to a single point of risk, reducing the likelihood of significant losses during volatile periods.
Time in the market vs. timing the market
One of the most common mistakes investors make during volatile periods is trying to time the market — selling assets during downturns and repurchasing them during recoveries. While this might seem like a logical strategy, it’s notoriously difficult to execute successfully. Missing just a few days of market recovery can significantly impact long-term returns.
A famous study by JP Morgan Asset Management found that over a 20-year period, missing the market’s 10 best days could cut returns by almost half.
Instead of trying to time the market, investors should focus on staying the course. Long-term, disciplined investing, supported by professional advice, is far more likely to yield positive results than reacting emotionally to short-term volatility.
How a financial advisor can help
Working with a financial advisor can be invaluable during periods of volatility. Advisors provide perspective, helping investors see the bigger picture and avoid making decisions based on fear or emotion.
They can also help investors develop a robust financial plan that accounts for potential market fluctuations, ensuring that short-term volatility does not derail long-term goals.
Advisors are well-versed in analysing key market indicators like the VIX, helping investors understand when volatility signals a genuine market correction or merely short-term noise.
By taking a measured approach to investing and maintaining a focus on long-term objectives, advisors help their clients stay on track, even when the market feels tumultuous.
The bottom line here is that volatility is not the enemy of the investor. It’s simply a reflection of the dynamic nature of the market.
Nigel Green is deVere CEO and Founder
Also published on Medium.
