Stock market volatility is a measure of how much a financial instrument’s returns bounce around. The higher the volatility, the less stable the returns, and the more difficult it is to predict how they might change over time. You can calculate volatility by taking the square root of variance, or by looking at the standard deviation (SD).
Volatility may also refer to a specific characteristic of an individual asset or market. For example, “growth stocks” generally have more volatility than “value stocks,” which are typically larger and less volatile. It can also be a measure of how a stock or an index compares to its overall benchmark, such as the S&P 500. A value of 1 indicates that the stock is expected to move by the same amount as the index, while a value of 2 implies that it moves twice as much.
Global events can spark volatility, too, especially if they’re unexpected. This could include a crisis in a major world financial center or a pandemic that impacts health and economic activity globally.
Regardless of the reason, volatility can cause investors to question their investment strategy or even abandon their long-term goals. It can also lead them to sell investments at a loss in order to avoid further losses, which can hurt their overall long-term return potential. While no portfolio is immune to volatility, a well-diversified one tends to reduce its impact. Working with a financial advisor can help you build an approach that reflects your personal circumstances and risk tolerances.