This is the fourth installment in an eight-part series: Navigating Market Volatility. In simple terms, market volatility is the relative rate at which the market goes up and down. Dramatic shifts can be scary, even for the most experienced investors. To keep market swings from making you anxious, take steps to help you respond to volatility in a deliberate way.
To read the previous post in this series click here.
Navigating Market Volatility: Look for Profitable Opportunities
The markets don’t move in a linear fashion. From the moment a security is offered to the public, its price begins to rise or fall based on market forces (such as the effect of supply and demand on trading). And security prices, while unpredictable in the short term, are affected by real things, including business fundamentals; a company’s current and estimated future earnings; world events (good or bad); and, in the short run, investor psychology.
Successful investors recognize that no one can accurately predict when emotional tides will turn. Former Federal Reserve Chairman Alan Greenspan said in 2007, “If I could figure out a way to determine whether or not people are more fearful or changing to euphoric…I could forecast the economy better than any way I know. The trouble is that we can’t figure that out. I’ve been in the forecasting business for 50 years, and I’m no better than I ever was, and nobody else is [either]. Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn’t changed. We can’t improve ourselves.”
Human behavior and stock prices can sometimes be more volatile than actual changes in fundamental business values. When investor emotions affect stock prices, inefficiencies can occur, leaving some companies temporarily mispriced. Savvy investors can take advantage of these market inefficiencies by purchasing securities that are underpriced and/or selling securities that are overpriced. Of course, the trick is knowing what and when to buy and sell.
Click to read Part 5 of the series: Try Not to Dwell on Short-Term Performance.
All investments are subject to risk, including the possible loss of the money you invest. Past performance does not guarantee future results. There is no guarantee that any particular asset allocation, or mix of funds, or any particular mutual fund, will meet your investment objectives or provide you with a given level of income.