Stock market volatility refers to the dramatic gains and losses resulting from rapid changes in asset prices. These movements can happen in groups of assets, like those measured by a market index such as the S&P 500, or individual stocks and other investments. Volatility can also be seen in day-to-day fluctuations in the price of assets, such as those that can happen with a single purchase or sale.
While market volatility can be frightening, it is a normal part of the investing process. Understanding what drives these events can help investors feel more confident in their decisions and may lead to a better ability to resist emotional responses that could hurt their returns.
Several factors can cause a shift in market conditions, including economic uncertainty, unexpected developments and changes in investor sentiment. For example, a war or political unrest can impact global economies and cause a decline in investor confidence, raising volatility. A drought in a cocoa-producing country can make chocolate scarce and raise the price, which can affect stock prices of public companies that manufacture or sell these products.
Volatility can prompt many people to change their investment strategies in an attempt to protect their wealth. But this often leads to rash decisions that can have long-term negative effects on their portfolios, such as selling investments during a pullback for fear of not being able to buy them again later or making a quick change in strategy without fully considering the effect. Instead, it’s important to stay focused on your goals and invest based on the work you did when creating your strategic plan.