Understanding Market Volatility: From a Financial Advisor

When a stock’s price shifts sharply within a short period, that’s volatility in action. When many stocks move like this at once, it can make investors uneasy. They may worry it signals trouble for the economy.

But while volatility can feel unsettling, it’s actually a normal part of investing. Knowing what it is—and what drives it—can help you keep your cool when markets get bumpy.

What Is Market Volatility?

Volatility refers to significant, often unexpected, price swings in the market, usually driven by large groups of investors buying or selling simultaneously. These price jumps can affect broad indexes like the S&P 500® or Nasdaq Composite, or individual stocks and commodities. While prices fluctuate constantly throughout the trading day, volatility typically describes more dramatic and rapid movement.

How Does It Work?

Volatility is a measure of how much a security’s price deviates from its recent average. The bigger the swings, the higher the volatility—and typically, the greater the perceived risk. Securities that hold their value with minimal movement are said to have low volatility and are often seen as more stable.

Two Main Types of Volatility

Implied Volatility (IV)

This forward-looking measure is derived from the pricing of options contracts. Essentially, it reflects the market’s expectations for how volatile a stock might be in the future. Option-pricing models like Black-Scholes use factors like the current stock price, time until expiration, and expected dividends. They estimate implied volatility (IV) as a percentage change.

Historical Volatility (HV)

Historical volatility looks at the past. It shows how much a stock’s price has changed from its average over time. It helps investors understand how turbulent the stock has been in the past, though it doesn’t predict the future.

What Triggers Market Volatility?

Several factors can cause volatility to rise, usually tied to uncertainty:

●      Government Policy: Legislative changes or unresolved debates—like a pending federal budget—can make investors nervous.

●      Economic Indicators: Concerns about inflation, interest rate hikes, or potential recessions can shake confidence.

●      Corporate Earnings: Quarterly results that surprise (either positively or negatively) can send stock prices soaring or plummeting.

●      Global Events: Political unrest, war, natural disasters, or supply chain disruptions can create ripple effects throughout global markets.

How Long Does Volatility Last?

There’s no set timeline—volatility can be short-lived or stretch out over months. Historically, it's incredibly common: Since 1980, the S&P 500 has had at least one 5% drop in 93% of years. Even so, the average annual return during that time has been over 13%.

Corrections (a 10% drop from recent highs) tend to last around 115 days on average, while bear markets (a 20% or greater drop) have had a median duration of 19 months.

Measuring Volatility

Standard Deviation:

The technical formula involves calculating the standard deviation of price changes and multiplying it by the square root of the time periods observed.

Beta:

This figure compares a stock’s volatility to that of a benchmark like the S&P 500. A beta of 1 means the stock generally moves in step with the index. More than 1 indicates greater volatility; less than 1 suggests less.

The VIX (Volatility Index):

The Cboe Volatility Index, known as the "fear gauge," measures expected changes in the S&P 500 for the next 30 days. A higher VIX usually reflects greater uncertainty among investors. Historically, a VIX around 20 is considered average.

Maximum Drawdown (MDD):

Maximum Drawdown measures how much an investment drops from its peak to its lowest point. A smaller MDD typically suggests more stability.

How Volatility Impacts Investors

When markets swing wildly, it can tempt investors to sell in a panic. But reacting emotionally can lead to missed opportunities—especially if markets rebound. Historically, markets have recovered and even reached new highs after downturns, though past performance doesn’t guarantee future results.

Strategies for Navigating Volatile Markets

Stick With Your Plan:

A well-built investment strategy—aligned with your goals, time frame, and risk tolerance—can help you stay the course during rough patches. History shows that long-term investors who avoid panic-selling often fare better.

Rebalance as Needed:

Market dips can be a chance to adjust your portfolio, bringing it back in line with your target asset mix. Diversification, or spreading investments across various asset classes, can help smooth the ride.

Invest Regularly:

Using dollar-cost averaging—investing a fixed amount on a set schedule—means you’ll buy more when prices are low and less when they’re high. It’s a steady approach that can help take emotion out of the equation, though it doesn’t eliminate risk.

Bottom Line

Volatility is a part of investing. It is not a reason to panic.

Instead, it reminds us to stay disciplined, informed, and focused on the long term. With the right mindset and plan, you can weather the ups and downs with confidence. Consulting with your financial advisor is always a good idea.

Sources:

https://www.fidelity.com/learning-center/smart-money/what-is-volatility

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Options The strategy discussed above is for illustrative and educational purposes only and should not be construed as an endorsement, recommendation, or solicitation to buy or sell any particular security.  Options involve risk and are not suitable for all investors.  Certain complex options strategies carry additional risk.  Please read the options disclosure document titles Characteristics and Risks of Standardized Options by clicking on this hyperlink text https://www.theocc.com/about/publications/character-risks.jsp     before considering any options transactions.

Covered calls provide downside protection only to the extent of the premium received and limit upside potential to the strike price plus premium received.