In the ever-changing world of financial planning and investment management, market volatility is a constant fixture. Investors often find themselves on a roller coaster of share price fluctuations, influenced by a myriad of factors.
At HighPoint Advisors, LLC, we work with clients in central New York, Syracuse, and other markets on many aspects of finances, including investing. Here, we’ll dive right into the nature of financial market volatility, explore its main causes, and discuss how partnering with an experienced financial advisor can be the key to managing portfolio risk and identifying worthwhile opportunities.
Understanding Market Volatility
Market volatility refers to the degree and magnitude of change in the trading price of a given financial instrument over time. In a way, it’s a measure of the uncertainty and risk in the markets. While these gyrations are normal and common throughout market cycles, they can be quite unsettling for some investors.
Volatility can come on suddenly and can result in rapid and unpredictable price movements. It’s important to note that volatility works both ways – prices can go both up and down – creating opportunities and difficulties for investors.
What Causes Volatility in the Markets?
No two market cycles are the same, and no two calendar years are full of the same issues and events, but there are some common causes of volatility in the financial markets:
The Economy
Many economic indicators are used to gauge the health of our economy, such as GDP growth, employment rates, inflation, interest rates, wages, and many others. Changes in these various indicators can have a significant impact on the stability in the markets. Unexpected or sudden changes to these indicators can easily bring on volatility.
Geopolitical Events
Political unrest, geopolitical tensions, natural disasters, military conflicts, and health crises are some examples of things that can have a substantial effect on markets as well. Whether expected or not, these types of events can quickly knock the markets off their course in the near term.
Company Performance
Stock markets move based in large part on the ability of companies to make profits over time. Earnings reports and financial results of these corporations dictate the direction of stock prices, and sometimes even small deviations from expectations can have an outsized impact on share prices in the markets. These positive or negative surprises influence investor sentiment.
Interest Rates
There are many critical central banks around the globe – such as the Federal Reserve in the United States – and the decisions made by these central banks can have widespread repercussions. Changes to interest rates can directly impact borrowing costs, inflation expectations, corporate budgets, as well as confidence in the financial markets.
How can an Experienced Advisor Help?
Navigating the financial markets can be very challenging and requires an informed and dedicated approach. There is more publicly available information nowadays, and data moves faster than ever before, so having an advisor with experience and knowledge is crucial to success.
An experienced advisor will conduct a thorough risk assessment to gain an understanding of a client’s risk tolerance and capacity. That knowledge will be used to identify strategies that are both suitable as well as a good match for the client’s comfort level. Investing is not a one-size-fits-all type of engagement, so the principle of diversification is important. Spreading a portfolio across various asset classes or sectors of the economy is central to reducing the impact of market volatility. Of course, the objective is not always just to have a low-volatility portfolio. An experienced advisor should be able to balance the client’s objectives while matching the amount of risk and volatility the client can handle.
Financial markets can change suddenly, so monitoring portfolios is a crucial part of the process. Advisors must be nimble (as needed) to respond to risks posed by the fact that current trends can change, and new trends emerge all the time. These changes also can present opportunities for advisors to use their expertise to identify undervalued areas of the markets during economic downturns. Doing that will help provide for portfolios to stay appropriate and keep an investor on his or her long-term path.
Our Financial Advisors Are Here to Help!
Market volatility can be scary, and it also can be an exciting opportunity. Knowing the difference is a skill that comes with experience. With the guidance of our qualified financial advisors, investors can navigate these fluctuations with confidence. HighPoint Advisors, LLC, works closely with our clients to craft portfolios that align both with financial planning goals as well as with risk tolerances. We aim to bring stability and an opportunistic approach to wealth management in any market environment.
Contact us today to start a conversation about your investing goals.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.