One of the main concerns for any type of investing is market volatility. Volatility measures the degree to which prices change over time. Another way to think of volatility is in terms of price swings. The greater and more frequently an investment’s price swings, the higher its volatility. Investments with high volatility present a higher degree of risk because their prices are unstable.
Short-term volatility is not necessarily indicative of a long-term trend. A security can be highly volatile on a daily basis but show long-term patterns of growth or stability. Some investments may maintain purchasing power over time, but can fluctuate wildly in the short term.
The advantage of long-term investing is found in the relationship between volatility and time. Investments held for longer periods tend to exhibit lower volatility than those held for shorter periods. The longer you invest, the more likely you will be able to weather low market periods. Assets with higher short-term volatility risk (such as equities) tend to have higher returns over the long term than less volatile assets such as money markets. Long-term investing may also offer tax benefits and significant saving in transaction costs.
It is very difficult to predict the best time to enter or exit the market. The speed at which markets react to news means stock prices have already absorbed the impact of new developments. When markets turn, they turn quickly. Those trying to time their entry and exit may actually miss the bounce.
It is challenging to invest with confidence while markets are volatile. However, short-term market movements should not alter investment discipline.
At FIRSTGLOBAL, we understand the importance of a well planned strategy and maintaining the disciplines required to assist our clients in managing the manageable risks and emotions that often cause irrational behaviour and unnecessary losses.