Investment volatility can be scary, but you can better weather stock market and interest rate volatility when you follow a comprehensive investment strategy that takes into account your goals, risk tolerance, and time horizon. Here’s what you need to know about volatility.
You can get an idea about how volatile the stock market is by checking out the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). The VIX measures stock market risk based on estimates of S&P 500 index option prices over the next 30 days. The higher the number, the more volatility.
Volatility in the fixed income market is usually not as dramatic as you’ll find during turbulent stock market trading days. Still, when interest rates move either up or down, bonds and other fixed income investments will often see a correlated change in rates.
If you own fixed income investments and hold them to maturity, interest rate fluctuations won’t affect you. If, however, you try to trade them before maturity as rates are rising, you could lose money. That’s why bonds may guarantee an interest rate held to maturity, but mutual funds – which trade their securities often – offer no such guarantees.
So how do you deal with volatility in your portfolio? Stay the course if you’ve prepared for the possibility ahead of time, and work with an advisor to keep pace with market and interest rate changes.
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