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Understanding Market Volatility
Investing in the stock market can seem like riding a roller coaster – up 100 points one day, down 75 the next, up 50 the next. But if you look beyond the day-to-day changes, the reality may seem less volatile.
Lots and lots of things can affect what the stock market does on a daily basis. Changes in oil and gold prices – which can themselves be very volatile – can have a significant affect on stock prices. Political or social unrest, especially in certain areas of the world, also can have an impact. In the U.S., economic indicators such as unemployment, interest rates or new home starts can cause prices to rise or fall, as can the performance of certain sectors or even specific companies. And this kind of day-to-day volatility can make some investors nervous.
However, most experts agree that daily performance is not important for the vast majority of investors. What a stock does on a particular day really matters only if it is the day you need to liquidate your stock.
The short-term volatility of stocks should be weighed against the long-term performance. Although historically stocks have had greater volatility than other asset classes, such as bonds and cash, they also have had greater growth than other investments in the long term. In fact, over the last 75 years, stocks have risen by an average of about 10 percent a year – which is more than twice the rate of any other asset class. Of course, past performance is no guarantee of future results.
The important thing is for you to understand your own time line. In general, the volatility of stocks declines the longer you hold them. So if you have many years until you need to spend your investment, you probably need to pay less attention to what the market is doing right now.
However, as you approach the time you need your money, you may want to look a little closer. Although stocks have risen an average of 10 percent a year, there have been periods of several years when performance was far below, or above, the historical average. And of course, the performance of individual stocks may not follow these historical trends.
Your financial adviser can help you understand the time frame of your investment needs, and work with you to design a portfolio that will help you meet those needs.