Market volatility is the statistical measure of a market or security's tendency to rise or fall sharply within a short period of time. Measured by standard deviation, volatility can be caused by the imbalances within trade orders in one direction or another. Volatile markets are characterized by wide price fluctuations and/or heavy trading.
Although there are inherent negative aspects, believing all indicators of volatility are negative is dangerous. Volatility can drive the novice investor to question his or her own investment strategies strictly due to short-term fear. It is crucial for investors to understand that volatility is inevitable, and attempting to navigate around it is risky.
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Markets tend to move up and down in the short term, and volatility should not be the deciding factor as to whether or not investors should immediately exit. With a strong understanding of volatility and its causes, investors potentially can take advantage of investment opportunities resulting from volatile markets. Here are two strategies to help you leverage volatility for your own benefit.
1. Ignore short-term chaos and leave investments until the volatility passes. One effective method commonly used in times of market volatility is to stay the course despite the current overreaction of the market. Even though this may seem lazy and counterproductive, it may insulate you from losses associated with attempting to time the market.
It is virtually impossible to time the top to determine when to get out, and just as difficult to discern the bottom and when to get back in and invest again. Typically, you would be better off to stay the course than attempt to time things and not do it well. This bad timing can further exacerbate your losses during these volatile times.
2. Purchase additional shares at lower prices. Market volatility can also create opportunities an astute investor can use to their advantage. Volatility can provide entry points for those investors whose time horizon and investment strategy is long-term. Downward market volatility presents investors who are bullish and believe markets will perform well in the long run with the opportunity to purchase additional shares at lower prices.