We live in an age where the media is ubiquitous. With so many outlets, channels, websites, publications, talking heads, etc.—often competing against each other for the same audience—it can be hard to tell if the information you’re getting is the information you need.
In the investment world, one of the biggest things the media gets wrong is the concept of “volatility”—specifically, how you should feel about it. The media would have you believe market volatility is something to fear, but that’s not always the case. In fact, the opposite is often true. Those with long-term investment goals and well-thought-out financial plans should embrace periods of high market volatility.
To learn why, let's first review what market volatility really means.
What Is Volatility in the Stock Market?
In general, volatility is how fast and how unpredictably something changes. When referring to investment markets, volatility means how quickly and unpredictably the markets are liable to rise and fall.
Markets move every single day. Small fluctuations (often less than 1%) in either a positive or negative direction are expected daily. But in a volatile market, these price swings are much more dramatic. And the more volatile the market is, the greater and more sudden valuations will likely swing in either direction.
Is Market Volatility Something to Fear?
Volatility in investment markets can be unsettling. After all, the definition of a volatile market is that it is unpredictable. As investors, we like a stable environment. We understand there are risks involved with investing, but when we check index performance on our phones or computers, we much prefer the steady climb of a growing market because it leaves us with a sense of control. The less control we have over something, the more likely it is to leave us feeling uneasy—especially regarding our money.
The media likes to position market volatility as something to be wary of because volatility is often associated with a drop in market performance or a sign that trouble is on the way. But the thing is, market volatility is inevitable. Due to the cyclical nature of markets, it's only a matter of time before the market peaks and valuations begin to drop. Otherwise, if the markets were continually growing, everyone would constantly be making money on their investments, and there would be no risk involved.
How to Take Advantage of Market Volatility
While market volatility can cause anxiety—even panic for certain investors—it also opens the door to opportunities for investors with long-term financial plans.
During the regular course of investment markets cycling through their different phases, they’ll periodically drift into territories of being “overbought” or “oversold.” If the market is overbought, securities are believed to be trading above their fair market value (FMV). If the market is oversold, securities are believed to be trading below their FMV.
“When the market is overbought, we reduce risk, lower equity exposure, and add floor stops and other airbags to portfolios,” said Ed Shill, a managing director at our Wealth Enhancement office in Rochester, New York. “When the market is oversold, we jack up exposure to stocks and risk and remove most, if not all, floor stops. Basically, you want to be cautious when the markets are overbought and aggressive when the markets are oversold.”
The mentality behind this thinking is that when the markets are oversold, and securities are trading below their FMV, you can buy in at a discount. And volatility can be a powerful indicator of when the markets are oversold.
“There is an old saying in our business: ‘The air comes out of the balloon faster than it goes in.’ We capture this concept with volatility measures,” added Shill.
Take a look at Figure 1 below. Every volatility spike above three standard deviations coincides with dips in S&P 500 performance. Then, due to the cyclical nature of markets, index performance tends to pick back up after these drops.
Figure 1. S&P 500 Performance vs. Daily Volatility Since 1957
Figure 1: Past performance is not a guarantee of future results.
While it can't be used as a crystal ball to tell the future, Shill believes that “the track record of high volatility calling oversold markets is fantastic.”
"People on TV are always saying to wait until volatility drops before you should get into the markets," Shill continued. "But when volatility is high is when you should buy in. Put your money to work for you. You might be a little early, but your money has grown much more when markets pick back up."
You can use volatility as one of many indicators that it's time to rebalance your portfolio and adjust your risk exposure in an oversold market.
What Should I Do About Market Volatility?
While the media likes to suggest that market volatility is something to fear, investors with long-term financial goals need to remember to not overreact to short-term market movements. Investing is a long game with long-term benefits. To get the most out of it, you need to be able to roll with the punches and weather the occasional storm.
Chances are, you are not looking to spend your entire nest egg in the next few months—or even years. And there are likely things you can do to take advantage of the volatility that goes beyond investing. Roth conversions and tax-loss harvesting are worthwhile strategies to consider when volatility spikes and the markets are down.
Reach out to a financial advisor to learn more, but most of all, take what you see or read in the media with a grain of salt and embrace periods of high volatility for what they are: opportunities.
2025-7182 03/25
