Investing: Understanding Market Volatility - It’s a Part of Investing!

“Volatility” is when economic markets rise and fall sharply in a short period of time. And lately, world markets have been very volatile.

You may have heard the terms “bull market” and “bear market” batted around. What do these terms really mean, and do they affect your investments?

A bull market is a period of time when stock prices are on the rise. These are the times when the markets give a 20 percent return for a number of years in a row.

A bear market is when stock prices fall and stay low for a long time. The fear of a bear market is what makes most people nervous about investing in market-based products. Vinod Karna, a former Sun Life Financial advisor, now Director of Diversity Recruiting for Sun Life’s Career Sales Force, believes that bear and bull markets, along with in-between periods of smaller ups and downs, are a normal part of investing. The markets have seen some pretty dramatic fluctuations over the past few decades. Market volatility is not an unusual experience. In fact, severe short-term volatility happens regularly – about every two years or so.

“No one has a crystal ball when it comes to predicting the ups and downs of the market,” said Karna. “Corrections are a normal part of a healthy market. Historically, markets eventually recapture losses, reaching and surpassing their former levels. This can present opportunities for long-term investors.”

While there is no way to completely protect your money from this volatility, you can put a plan in place to protect your investment. When you put your savings plan into place, your advisor will help you to create your plan based on your long-term goals and expectations. You must consider your hopes for the future, your comfort with investing and even market volatility. No one can predict what the markets will do tomorrow, but remember to keep a few points in mind.

Asset allocation

Deciding where to invest your money is called “asset allocation”. Your advisor likely suggested selecting a mix of different investments to help keep your risk as low you can and keep your return as high as possible. Since not all investments are affected by market volatility at the same time, some will keep rising in value while others fall.

Dollar cost averaging

Investing a set amount of money on a regular basis, such as through a monthly savings plan, can offer you more buying power. When the markets are down, your regular contributions will be used to purchase more units. When prices rise, you’ll purchase fewer units at the higher price. As a result – the average cost per unit could end up being lower.

“The key is to work with an advisor who can help you develop a personalized financial plan that meets your needs,” said Karna.

For more information on financial planning or to find a Sun Life Financial advisor visit www.sunlife.ca.

CNM