Stock market volatility is the degree to which stock prices fluctuate over time. It can seem scary when prices move quickly and wildly, but it’s important to keep in mind that volatility is normal and that markets generally recover after periods of turmoil. Investors who stay invested for the long term have historically seen significant portfolio gains even when stocks experience high volatility.
Stock prices may become more volatile when investors are uncertain about future economic trends or corporate earnings expectations. Global strife and natural disasters can also prompt volatility as uncertainty over supply chains or other issues affects companies’ profits and the economy’s overall health. For example, the COVID-19 pandemic led to dramatic stock market declines early on but rebounded quickly as fears dissipated.
Historical volatility measures how much an asset’s returns have deviated from their average over a given period of time, using statistical tools like standard deviation and variance. These metrics offer a gauge of how bumpy an investment’s return history has been, helping to predict how bumpy future returns might be.
Different types of investments tend to have differing levels of volatility, with stocks and bonds usually being more volatile than real estate or cryptocurrency assets. The relative stability of some sectors and company sizes can also impact volatility: For example, utilities and large companies with strong cash flow often have lower volatility than tech stocks or speculative names. Spreading your investments across asset classes and sectors, along with reducing trading costs through dollar-cost averaging, can help reduce volatility.