AD – this article was created as part of an on-going partnership with Wealthify.
You may have seen that market volatility has increased in recent months, due in large part to the Russia-Ukraine conflict and a rise in Covid cases globally, amongst other factors.
If you’ve just started investing, or even if you’re a seasoned investor, then the ups and downs caused by events such as these can be scary. However, with investing, volatility (where the value of investments move up and down) is normal and it is to be expected from time to time.
In this article, which is the first in a two-part series with the investment service, Wealthify, we explain what ‘volatility’ is and how it could benefit investors in the long-term, so that you can feel more confident when dipping your toe into the world investing – even when markets are experiencing a downturn.
So, what is stock price volatility?
‘Volatility’ is a statistical measure that captures the size of moves seen by an investment, like a share or fund, over time. In simpler terms, it is how the value of an investment goes up and down, which could happen many times throughout your investment journey.
Because it’s normal for the performance of financial markets to rise and fall, stock price (or ‘market’) volatility is present in all types of investments, including shares, commodities (such as gold and oil), and property.
The more volatility that comes with an investment, the larger potential returns an investor could make. This is due to the fact that the value of a ‘volatile’ investment could rise and fall substantially over time.
Could volatility be a good thing for investors?
Volatility could be seen as a great thing for people who invest regularly and do so for the long-term, as it may provide an opportunity to buy investments at a lower entry price in the event that markets are down. This means your potential returns could be higher because you may be able to sell these investments for a higher price later down the line.
However, clearly, volatility isn’t always a good thing for investors. For example, those who have a shorter investment time frame (such as someone who might be looking to cash in their pension soon) could be negatively affected by a surge in volatility if the market has dropped when the time comes for them to sell their investments and withdraw their money. This is because they could be making their losses real instead of giving their investments time to potentially recover.
The potential benefits of investing for the long term
Before deciding to invest, you might want to consider how long you’re planning on investing for and whether you’re investing with long or short-term goals in mind. In other words, think about your time in the market vs timing the market.
Investing for longer periods could help you to ride out any dips in the market, which are to be expected from time to time as they are a normal part of the investing experience. So, with that in mind, it could be helpful to stay calm if you do experience a dip in the value of your investments. In fact, by selling during this time, you will merely cement your losses (as these won’t become ‘real’ losses until you sell your investments).
Basically, until you cash out your investments, the highs and lows are superficial. By staying invested when markets fall or even continuing to invest, you could benefit from future growth when the markets recover.
In fact, one famous example is Black Monday, which occurred on October 19th in 1987. On this day, the Dow Jones Industrial Average lost more than 22% of its value, which caused the majority of investors to sell during this time. Those who didn’t panic and stayed invested in large cap stocks were rewarded with total returns of 16.6% in 1988 and 31.7% in 1989 – and this was after one of the most severe drops in history!
Additionally, those that stayed invested during the market dip of 2020 (which was caused by Covid-19) also benefited from a recovery. In December 2021, it was reported that the FTSE-100 the UK’s benchmark stock index had returned to the level it stood at in February 2020 – which was a month before the UK went into lockdown for the first time.
By investing for the long term, you could also supercharge your investments by benefiting from compounding returns. ‘Compounding’ is when the earnings from your investments are reinvested and generate additional returns themselves. Therefore, thanks to the power of compounding, you could potentially experience greater returns in future.
How can you start investing?
As Wealthify’s research shows, 3 in 4 British savers don’t feel confident investing, and one of the biggest reasons for this is due to a lack of understanding of how the process works. But you no longer have to be a stock market expert with thousands saved in the bank to invest. In fact, quite the opposite.
There are a number of investment services that will make all the investing decisions for you, with Wealthify being a prime example. All you need to do is choose the type of investment account you want to open (such as a Stocks and Shares ISA if you still have some of your ISA allowance left or a General Investment Account if you’ve already used it) and let them know how much you want to invest and how often.
Their experts will then build your perfect Plan based on your appetite to risk and manage it for you, keeping an eye on the markets to ensure they make the best possible decisions to help keep your Plan on track. Find out more about Wealthify and how easy and affordable it could be to get started.
Past performance is not a reliable indicator of future results.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
As with all investing, your money is at risk. The value of your portfolio can go down as well as up and you could get back less than you put in.
You should seek financial advice if you are unsure about investing.