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Anyone who has observed the financial markets over the last couple of decades can’t fail to have noticed that there have been lengthy periods of calm, interspersed with periods of extreme volatility. 2020 has seen just such a period already with Covid-19 causing markets to fall sharply with the FTSE 100, hitting its lowest level since 2016. While this is undoubtedly a serious situation, especially for those who are looking to realise their investments in the near future, volatility does have its upsides for investors.
In fact, it would be fair to say that without an element of volatility in all kinds of markets, whether we’re talking about currency exchange, stocks, or commodities, then there would be little point in investing as the value of investments would generally remain static over both the short and the long term.
So, as a starting point, it’s important to understand what the root causes of volatility may be. This is especially true as they can come in many forms which may be very different depending on the form of investment. For example, for people interested in forex trading, most often it may be the overall economy of specific countries that is the driving force behind extreme market movements. Alongside this, the overall political situation can also have a major effect.
Stock markets tend to react to both national and international events as well as seeing particular sectors being hit hardest. To use the example of the coronavirus, it is the companies operating in the travel and leisure industries who have been most affected, as it is anticipated that people will be staying at home for the next few months rather than venturing out and potentially exposing themselves to infection.
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There is a strong school of thought that the market volatility that we’ve been seeing in the last few months is actually a very good thing for would-be investors. This is because, when stock prices are low, they make for a great opportunity for buying. No less an expert as Warren Buffett has proclaimed in the past that when markets are on the up and huge sums of money are being invested by others we should watch our step. But, conversely, we should be “greedy when others are fearful”, and invest when the markets are jittery.
The principle at the heart of this counterintuitive approach recognises that investing is a long-term exercise. Even in the deepest of financial crises, there will always be the prospect of shares and currencies returning to their previous levels or higher. Admittedly, this may take years instead of weeks or months but, for those who can wait, there is a good chance that it will pay off in the end.
Plus, if there’s a period of upward volatility on the way, it may pay dividends far sooner than anticipated.
So, if any of the above goes to prove anything, it’s that volatility is a two-edged sword. But the tricky aspect is ensuring that you always stay on its right side through thick and thin.
