Volatility

vol’a•til’i•ty
The state of being volatile
1. The state of having a low boiling point and evaporating readily
2. (computing) The state of not retaining data in the absence of power
3. The state of being able to fly
4. The state of being unpredictable
5. (Financial markets, countable, plural volatilities) A quantification of the degree of uncertainty about the future price of a commodity, share, or other financial product
Source: http://en.wiktionary.org/wiki/volatility

Life is full of ups and downs. While we can anticipate some events, such as when a child is born or we close on our first house, but we’re thrown off by others, such as a job layoff or a medical emergency. Interestingly, one person’s up is another one’s down, such as when the youngest leaves home for college. (I cried for a month, my husband broke in new golf clubs). Throughout our lives, then, we experience periods of stability – same ol’, same ol’ – and periods of volatility.
The same holds true for stock markets. Periods of stability are followed by periods of volatility and right now, we’re in the midst of a volatile period. One day the markets are up and all the indicators are green and the next day they’re down and everything has turned red. The third day could be green or red; it’s hard to say. In such volatile times, attempting to anticipate the impact of any new piece of information seems futile because that news can quickly be swallowed up by newer news and so the volatility continues.
So what can we do about it?
1. Accept that volatility exists. When you invest, recognize that the prices of your investments will rise and fall, sometimes sharply. As much as we would all like the rise to be a consistent upward movement, it just doesn’t happen that way.
2. Have a long term investment plan and stick to it. Let’s say your investment goal is to stop working and retire in 15 years. Your plan includes saving a certain amount per year and investing so that it grows over this long-term. Stay with the plan. Making long-term investing decisions based on each day’s market news can throw a wrench in your long-term goals.
3. Understand your emotions and keep them out of your investment-decision process. Making long-term investment decisions based on emotions such as fear or greed causes you to lose. You end up buying stocks after prices have gone up and selling them after they’ve gone down. And then you kick yourself so don’t do it.
4. Don’t take more investment risk than necessary to achieve your goals. At a basic level, this simply means don’t have too much invested in stocks. But it also means having a proper investment mix (stocks, bonds, cash) and diversification (not too heavily invested in a single company, industry, or country).
5. Don’t look. Sounds crazy but this period of volatility will end at some point. If you find yourself checking your portfolio daily, stop. Unless your plan and your goals have changed, looking daily isn’t going to do any good. Make sure your overall financial is in solid shape and let this period of volatility pass.