Stock market volatility can be a source of investor anxiety and fear. But a well-diversified portfolio, including stocks and bonds, can help reduce the impact of volatile markets on your financial goals.
Volatility refers to how much the price of an investment (like a stock, mutual fund, or exchange-traded fund) moves up and down over time. An asset’s volatility may be influenced by its past performance, its expected future returns, or both.
A stock’s volatility is typically expressed as the standard deviation of its daily price movements over a defined period, such as a month or a year. This measure is then annualized by multiplying it by 16 (the square root of 256), which approximates the average number of trading days in a year. Alternatively, a stock’s volatility can also be measured by its beta, which compares the fluctuations of the stock to those of the overall market or an appropriate index.
The Chicago Board Options Exchange created the Cboe Volatility Index (VIX), a key gauge of 30-day expected volatility conveyed by options prices on the S&P 500 Index. The VIX is widely used by traders to gauge the riskiness of investing in the US stock market.
Investors can reduce their vulnerability to market turbulence by working with registered investment professionals—check FINRA BrokerCheck to see if a person is licensed to sell securities—and sticking to a comprehensive financial plan. It can also be helpful to maintain a diversified portfolio and to avoid chasing the market, either during a downturn or in a recovery.