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Market Volatility

Market volatility is a measure of its overall price dispersion — the size and frequency of the price swings around the market’s average price. Most link market volatility to price declines, but in fact it describes both upwards and downwards movement. Generally, market volatility is normal and is an indicator that markets are functioning correctly.

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[Alex 00:00] So Mike equity markets — they go up and they go down. Today's topic is market volatility. Question number one we’ve got here is what is market volatility?

[Michael 00:12] Well, for today's topic, we'll talk about market volatility regarding stock markets. In finance, volatility is typically a measure of return dispersion — a fancy way of describing the size and frequency of price swings around assets, or average Price. Generally speaking, the more volatile something is, the harder it is to predict outcomes, particularly in the short term.

[Alex 00:36] So market volatility is the measure of the swings for the entire market. The S&P 500 index, the S&P TSX Composite Index. I think most associate volatility with markets that are heading down but volatility actually describes both upside and downside movement.

[Michael 00:51] That's a great point.

[Alex 00:51] Yeah. Wouldn't it be nice if everything just went up steadily? So, you know, what really causes market volatility?

[Michael 00:57] It's a great question. Markets bouncing around doesn't sound like a good thing naturally, but it's actually a normal part of stock markets. Volatility is actually an indicator that markets are functioning correctly, that market participants are receiving information and digesting it appropriately.

[Alex 01:15] So what kind of information are we talking about there? Things that we see all the time. Company specific news, earnings, acquisitions, geopolitical events, wars, tariffs, things like the pandemic. Economic news, interest rates, inflation, GDP growth, everything basically. We typically provide commentary on these major events and potentially how they impact markets and our client portfolios. You should definitely check out the MD Market Watch podcast and blog for more information about that.

[Michael 01:39] So Alex, is market volatility a good thing?

[Alex 01:41] I guess it can be! Again, market volatility, you touched on it earlier, shows that the market is taking the latest information and adjusting. Also, no one is averse to upside markets.

[Michael 01:53] If prices are irrationally too high, markets will eventually gather the information to recognize this and course correct. Same thing happens when prices are too low of course. One way to look at it is that market volatility can be a source of opportunity, both on the buy and the sell side. So with that said, how can you manage market volatility?

[Alex 02:13] That's a great question. Now, I think you can't completely remove market volatility from a portfolio that invests in stocks, but you can minimize it to a certain extent. I think it's much easier said than done. But you can manage market volatility by being a disciplined investor really, right? Diversifying your portfolio with different asset classes, different sources of return can certainly help reduce volatility.

[Michael 02:32] Also invest to achieve your financial goals, right? Clearly define your goals so you can invest in a diversified portfolio that will generate the appropriate returns over the correct timeframe to achieve those goals. No sense in taking on more risk for potentially higher returns when lower returns at a lower risk level will do. I really think understanding the level of volatility to expect from your portfolio and your ability to stomach it is important too. Don't overreact to the upside and downside market volatility. Going all in on the latest hot stock or panic selling, for example, could seriously impact your ability to achieve your goals. Lastly, speak to a professional! Understanding what's happening and why can go a really long way.

[Alex 03:13] Yeah, I think we're really just scratching the surface here. For your unique situation, contact your MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.