How to Identify and Avoid Risky Stocks and Bonds
If you plan to invest in the stock market, one of the terms you are likely to hear is “market volatility.” Market volatility can impact your investments considerably, depending on the specifics of your portfolio.
What is Market Volatility?
Market volatility is a concept that explains the level of uncertainty associated with the stock and bond market based on changes in the value of securities.
High market volatility indicates that the price of securities can change dramatically in a short period of time. Changes can be positive or negative.
Low market volatility indicates that significant swings in the prices of security are less likely to occur and that prices are more likely to remain relatively stable over time.
What Causes Market Volatility?
Many different factors can impact market volatility, sending prices of securities in either direction. Some of the most common factors that determine the volatility of the market include:
When investors are concerned about the safety of their investments for any reason, the price of equities and bonds can be affected. For example, when investors are worried that they might lose money in the market, they may sell their securities in anticipating of falling values. Unfortunately, this trend can actually cause prices to fall.
Political events within Europe and other countries also have a significant effect on market volatility. For example, when a key politician takes office or makes a speech about the economy, markets may react in anticipation of new policies or changes to existing policies that they believe will impact the market.
When natural disasters have an impact on natural resources, the flow of goods and services and/or the money supply, the markets may become more volatile in response.
Major Events in Foreign Markets
Because businesses in Europe rely on relationships with businesses overseas, major events occurring in foreign markets can also impact the markets in European countries. For example, a substantial drop in the value of U.S. stocks may lead to increased volatility in European stocks.
Public relations issues
In some cases, market volatility won’t affect the entire stock and bond market, but may affect only a particular company or sector. For example, when a large company suffers a public relations crisis, prices for that company’s stock often fall.
How Is Stock Market Volatility Measured?
Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.
However, it is important to note that the absolute value of the standard deviation will also depend on the price of the security.
Thus, standard deviations for securities with higher prices will be larger, but this doesn’t always indicate increased volatility. In order to interpret standard deviation as a measure of volatility, the price of the stock must be taken into consideration.
What Does Market Volatility Mean for Your Investments?
Market volatility can tell you a great deal about the safety of your investments. The more volatile the market, the higher the risk. For example, if you pick a volatile stock at the wrong time, this can have a sizable impact on the return of your investments.
Although market volatility can be an informative measure, calculating and interpreting volatility is a complex process. If done incorrectly, it can lead to poor investment decisions and financial loss. For this reason, it is best to leave this task to the experts!
Understanding the Volatility Index
Volatility indexes are tools investors can use to estimate future volatility of the market. One of the most popular volatility indexes available is the EURO STOXX 50®, which is a stock index specific to Eurozone equities.
This index is composed of 50 of the largest, most liquid equities on the European market. The method used to calculate this index is incredibly complex, and calculations are updated every 15 seconds while the market is open.
How to Trade During Market Volatility
During times of high market volatility, it is not wise to attempt to “play” the market to make money.
Instead, you need a carefully planned investment strategy with long-term goals. Warren Buffett once said “My favorite time frame is forever,” which serves as a reminder that investing with longevity in mind is usually more effective than trying to time the market.
One of the strategies that may be used to navigate a volatile market is known as Value Investing. This strategy involves actively seeking out stocks that have been undervalued by the market, which means that they are selling for less than they are worth.
This strategy is built on the idea that the market often “overreacts” to both positive and negative changes, which leads to stock price changes that are more dramatic than they should be. Eventually, the true value of the stock will be reflected in its price and the investor is able to earn a profit.
Whatever your investment goals may be, it is always essential to consult a professional when structuring your stock and bond portfolio. For the best results, each security in your portfolio should be carefully selected and analyzed on a regular basis to ensure ongoing profitability.
Genève Invest can help you develop a portfolio that minimizes risk and maximizes returns. For example, we offer fixed income corporate bonds, which provide relatively low investment risks with a high level of profit stability. These bonds are also highly transparent and offer attractive returns. We believe these bonds are an important component of any healthy investment portfolio.
Which Direction Is the Stock Market Headed?
Because no one can predict the future of the stock market with absolute certainty, it is impossible to know exactly where it is headed at any given time.
However, it is still possible to prepare for periods of substantial gain or loss with the right tools and guidance. Genève Invest can help you devise an investment strategy that includes contingency plans for substantial changes in the stock market without compromising your profits.
Why Value Investing Is a Better Strategy than Trying to Play Market Volatility
Trying to play market volatility often leads to loss for the investor. It is based on luck and intuition, as opposed to time-tested investment strategies. Value investing, on the other hand, is an approach built on logic and a history of stock market trends.
At Genève Invest, we are traditional value investors. We understand that all companies have an intrinsic value that isn’t always reflected in the current stock price. We also know that, in the long term, the intrinsic value and the stock price will always converge. Thus, we can seek out companies that are currently undervalued in order to earn a profit over time.
Why Genève Invest Avoids Speculative Investing
At Genève Invest, emotional factors have no influence on any of our investment decisions. We understand the immense risks associated with gambling on volatile stocks in volatile markets. Our clients are always our top priority, and we are not willing to put their hard-earned money in jeopardy, so we avoid gambling in volatile markets at all costs.
Rather than making choices on a whim, Genève Invest bases all decisions based on well-founded analyses of the market and individual securities. We also use technical indicators to determine when it is appropriate to buy or sell.
Get the Right Investment Guidance
Market volatility is a complicated concept that can be difficult for even the most seasoned investors to fully understand. For this reason, it can be highly beneficial to trust your investment decisions to a highly-qualified firm with a reputation for success.
Genève Invest offers comprehensive, customized investment solutions to every client. Our approach is always based exclusively on our client’s unique needs and goals. We do not endorse the products of any third-party institution but instead focus on those products that provide our clients with the best returns. For a free portfolio analysis, please contact us today.