Volatility: A Bumpy Ride Worth Taking – Napkin Finance

A Bumpy Ride Worth Taking

March 6, 2020

You’ve probably heard the term “market volatility” in recent days, most likely in the same breath as “coronavirus.” The pandemic caused a plunge in global markets as consumer spending dropped and manufacturing decreased following the virus’s spread.

But what exactly does volatility mean? It refers to an investment’s price stability, risk, and likelihood for high returns. The more volatile an investment is, the riskier a bet you’re making — and when risky bets pay off, you’re likely to get a higher payout. A more stable investment, such as a bond, is less heartburn-inducing, but you’re probably not going to get as large a long-term return as you will with more volatile stocks.

Of course, the equation isn’t as simple as “big risk=big return” or “conservative investment=lower but guaranteed return.” Take cryptocurrencies, for instance. They are extremely volatile, and some early adopters made millions off them. But ongoing regulatory uncertainty and the lack of widespread adoption has kept the risks high, and people have also lost millions on crypto as well.

Seemingly low-risk investments aren’t always a sure thing, either. Bernie Madoff pulled off massive fraud in part by showing consistent returns year after year. Stocks that look *too* stable to be true probably are.

To simultaneously take advantage of and protect yourself from volatility, you can diversify your investments with a mix of stocks, bonds, and other opportunities that balance out one another’s risk factors.

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The more you know…

  • Politics influences global market performance — so much so that the Dow futures index jumped by 500 points after Joe Biden’s come-from-behind Super Tuesday victories. Keep an eye on the markets as the nominating conventions, and ultimately the election, get closer. You’ll likely see more swings as candidates pull ahead.
  • Have a love/hate relationship with social media? That doesn’t mean you can’t make money off it. Ubiquitous as social platforms are, there are also exchange-traded funds you can buy into that invest in the biggest social media companies. Or, you can buy stocks in the businesses directly, though an ETF can help you diversify your investments.
  • Slow and steady wins the investment game, even if you’ve invested in high-risk stocks. Markets fluctuate all the time — see last summer’s drop over tariff tensions between the U.S. and China — which is experts advise taking the long view. Even as stocks rise and fall, you’re likely to earn on your investments over time, as long as you’ve created a portfolio that aligns with your risk tolerance.
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