What To Do When The Market Is Highly Volatile
Nobody likes uncertainty, and if there’s anything the market is during periods of intense volatility, it is unstable. However, just as the market is in a state of disarray, investors are usually in panic mode.
Nobody likes uncertainty, and if there’s anything the market is during periods of intense volatility, it is unstable. However, just as the market is in a state of disarray, investors are usually in panic mode.
Many investors begin to panic, worry about whatever strategies they have used for their investments, and sometimes lose sight of their long term objective. But this is exactly what you shouldn’t do!
No matter how haphazard price movements seem in the short term, it is only for a short period of time. As long as the company has met all the criteria for you to have chosen it in the first place, you need to allow it to play itself out.
Assess The Reason For The Volatility
As highlighted in our last post, there are so many reasons why volatility exists in any market. At the core of these reasons, however, is Efficient Market Hypothesis which simply theorizes that the market reacts to the information available to it in different ways.
While the volatility movements themselves are affected by the collective reactions made by the investors of that market, there is a reason for that panic. It could be a full economic issue, a new announcement, political instability and so on.
As long as the issue is not a fundamental one – for example one that threatens the ability of the company to stay in business for too long, just wait it out. If it seems to be really scary, then rather than pull your funds, hedge your security against another. A stop-loss order, for example, can help you sleep better.
Assess All Your Options
The mistake investors make in situations as this is to react impulsively. Impulse will only cause more harm. Rather, list out all your options as well as why they are good or bad.
For example, if one option is to sell right now, the “positives” that come from selling could be that it makes you feel comfortable that you’re out of the mayhem. However, the negatives could be that it takes you away from your investment goals.
More often than not, you would be able to think more rationally after this honest assessment.
Don’t Do Anything, But Hold
A great tip is to just wait and see. Understand that in periods of volatility, the price fluctuations are a result of the heavy trading going on in the market. More often than not, people are taking exactly one course of action.
It could be that everybody is buying an asset, but it could also mean that everybody is selling. As such, not reacting allows you to see the market play itself out.
For example, if everybody is buying, it means the price is low and it is only a matter of time before the laws of demand and supply catches on to it and balances things out.
Holding your investment and waiting things out does not mean nonchalance. It just means you can see beyond the chaos to where your goals lie.
A quote by Mitch Goldberg reads, “Changes to one’s investments and financial plan under pressure raises the opportunity to make mistakes, which could be costly now and in the future.” Don’t make such mistakes.
Written by Lawretta Egba.