Investment guide

What is market volatility? A complete guide (2024)

What is market volatility? And how do you manage it?

This is a complete guide to market volatility in 2024. Explore the factors that can influence the market.

In this new guide you’ll learn:

What is market volatility
Factors that contribute to market volatility
Types of investment funds
Ways to handle volatility

Understanding market volatility

Volatility is normal.

Markets go through a natural cycle of ups and downs. ‘Market volatility’ is a term used to describe the degree that prices are moving up or down at a particular time (versus the average extent of such ups and downs). Where there is high volatility, this indicates that a lot of movement up or down is occurring at that particular time, while lower volatility indicates more stability.
The volatility of investments can also be used to compare one type of investment against another. If an investment is described as more volatile, it has the potential to experience greater fluctuations in value.

Volatility isn’t a bad thing.

Because markets never stay still, the value of your investments will go up and down in the short term, but historically it trends upwards over time. So, when markets are down, you’re buying at a cheaper price and when they recover, your initial investment is worth more than when you started.

Expect to see your investment balance move up and down – it's normal.

Remember, markets have historically trended upwards over time. Stay the course, focus on your long-term goals and you’ll be okay. If market movements are causing you stress, get in touch with one of our advisers to help get you into the right fund that suits your goals and risk preference.

What are the main factors that contribute to market volatility?

A wealth of factors can affect market volatility.

Macroeconomic factors: Inflation, interest rates, industry trends and changes in consumer sentiment.
Unexpected events: Wars, pandemics, and natural disasters.
Company-level factors: Performance figures, announcements, and strategic decisions.

These factors can influence an investor’s decision to purchase or sell investments. And if several investors have the same sentiments at the same time, the resulting volume of transactions can affect market prices.

Volatility can be exacerbated by investors behaviour. When markets are trending down, some investors may sell to minimise losses, out of fear the trend will continue. On the flip side, other investors may help to stabilise the market by buying while others are selling when they believe it’s good value.

Dealing with market volatility is about avoiding panicked, rushed judgements, and instead making considered strategic decisions.

What’s happening in the markets in 2024?

Change is the only constant in financial markets. For an update from our investment team about what's happening in 2024, check out our market commentary.

Can my investment balance go down?

Yes. All investment funds have some degree of risk, and your balance can go down. The degree of risk depends on where the investment fund sits on the risk and return scale. Put simply, the lower the risk, the lower your potential return, and the greater the risk, the higher your potential return.

Types of investment funds and market volatility

The investment funds you invest in is determined by your risk profile (the risk versus return an individual investor is comfortable with).

Higher-risk funds tend to be focused on growth assets like the share market and are generally more susceptible to larger movements away from the average price over time. Lower-risk funds tend to be focused on income assets like cash and bonds, which historically experience less volatility.

The higher on the risk scale a fund sits, the greater the potential for larger movements in price. However high-risk funds can generate better returns over the long term when compared to low-risk funds, as over time the volatility can be smoothed out. Lower-risk funds tend to provide lower but more consistent returns in the long term, and more security in the short term.

As an investor, you need to understand the level of investment risk you feel comfortable with. The level of risk associated with your chosen fund(s) can provide you with insight into the typical levels of market ups and downs you could expect to see in your balance. Remember that the value of that fund may rise and fall, and returns may be negative from time to time.

Ways to handle market ups and downs

Market volatility can be unsettling, but there are strategies that investors can use to navigate it effectively. Here are some ways to deal with market volatility:

Investment goals and timeframes

Before you choose the funds you'd like to invest in, consider what you want to achieve and by when. These goals can form the foundation of your investment strategy.

The more time you have, the more risk you can consider taking. For long-term goals (10+ years), you may be comfortable with investing in higher-risk funds that have more exposure to shares. This gives you the time and space to smooth returns over time while benefitting from compounding returns.

For short and medium-term investment goals that you'd like to achieve in 1-10 years, you might be more inclined to invest in more conservative or balanced funds that place a higher proportion of investment in cash and bonds.

Knowing your investment goals and timeframes is important. Once you've determined these two factors it will help you understand your risk appetite as an investor.

Risk appetite

Your risk appetite is how comfortable you are seeing market volatility potentially affect your investment balance. Market ups could see your investment balance grow, while market downs could see your investment balance decrease. Having long-term investment goals can provide you with more time to ride out market ups and downs that can come with higher-risk funds.

It's important to think about your investment goals, timeframes and risk appetite to understand whether you're still comfortable with the level of risk you're taking. As you move through different life stages, like aging and moving closer to retirement, your investment time horizons become shorter, and you may require more certainty. So, if market ups and downs play on your mind, your risk appetite may have changed and perhaps it’s time to rethink your investment strategy.

To help you understand your own attitude toward risk, you can seek financial advice or work out your risk profile at sorted.org.nz.

Have an emergency fund

Ensure you have an emergency fund in an on-call cash account. Having ready access to money you’ve set aside will prevent you from being forced to sell investments at a loss during a downturn.

Diversifying your investments

Diversification helps you manage your investment risk and protect against market downturns by putting your eggs in lots of different baskets. One of the many benefits of investing with AMP is that your money is typically invested in all sorts of assets, sectors and markets all around the world. Diversifying can help to protect your investment, as while the value of some assets might drop, the value of others may increase.

Try a dollar-cost averaging strategy

Regularly invest a fixed amount, such as $50 each payday. This strategy, known as dollar-cost averaging, helps smooth out fluctuations by buying regardless of whether prices are high or low.

Remember that markets can and do recover over time. Staying informed, having a plan, and diversifying your investments can help you weather market ups and downs. Focus on your long-term goals and if in doubt, zoom out.

Changing investment strategy when markets are volatile

You need to be careful with your investment strategies during market volatility.

When markets fall sharply and you see your account balance dropping, you may be tempted to change your investment strategy. It's important to remember that moving to a lower-risk investment fund will likely lock in any losses you’ve experienced, as you’ll be withdrawing your money or switching funds when prices are lower. Switching from high-risk to low-risk funds could also see you missing out if there is a market recovery.

Consider this comparison: would you rush to sell your house when the value of your property drops? You‘re probably more likely to wait for the value to bounce back before selling. However, it’s not necessarily wrong to realise your losses – it all depends on your personal circumstances and your attitude to risk. It’s an individual decision that can benefit from expert advice.

Looking to invest?

At AMP, we offer a range of investment options that may suit you. Because everyone's needs are different, you should always seek financial advice or other professional advice relevant to your personal financial situation. For financial advice, we recommend you contact your Adviser. If you don’t have an Adviser, contact us on 0800 267 5494 or find an adviser online.

FAQs

What is good volatility for a stock?

Stock prices tend to have higher volatility than low-risk investments like cash and bonds. That said, individual stocks can vary greatly in terms of risk-reward profile. Blue chip stocks, like many of those listed on the S&P 500, tend to have demonstrated a level of stability and long-term growth, although you need to keep in mind that their value can still change day-to-day based on internal and external forces.

How do you read market volatility?

There are a few ways to read market volatility. Historic volatility is measured through ‘standard deviation’ – the degree of variation of a trading price over time. Implied volatility, meanwhile, looks forward in time to estimate how volatile a stock might be in the future.

Historic volatility and implied volatility deal with quite complex and technical mathematics, so a better way to read market volatility is to get advice from experts who deal with it every day, and who can convert all the jargon into layman’s terms. AMP’s market commentary is a great place to start.