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What is volatility and how does it affect investments?
What are the best assets for investing in a volatile market? – Volatility is a term used to describe the price fluctuations of a particular security, fund, or market index over some time. It’s also a measure of how much the price of an investment fluctuates. The higher the volatility, the greater the price variation between highs and lows over a given period. So for instance, in a volatile market if you look up gold price today in Siliguri on two different dates you will see massive variations. However, gold is pretty safe in such cases as we will see later on in this article.
Another example would be that, if you bought stock in a company one day and sold it a few days later for only slightly more than you paid, that’s low volatility. But if you bought the same stock one day and sold it at twice the price only a few days later, that’s high volatility.
What causes extreme market volatility?
Many factors can cause extreme market volatility. They include market uncertainty about upcoming events like elections or geopolitical conflicts; economic downturns; corporate earnings reports; and changing interest rates that affect stock prices. When investors get nervous about any of these types of events or others, they tend to sell off their stocks. That creates downward pressure on prices. When prices reach low levels, investors tend to see good values and start buying again. The buying starts another bull run with prices rising until they get too high when investors sell off their stocks again to lock in their gains.
So here are some strategies you can follow to avoid losing and for making the most of volatile markets:
1. Rebalance your portfolio
The principle of rebalancing is simple: it means that, over time, an investor will sell off portions of his or her winning investments and buy more of the losers. This ensures that the investor’s portfolio maintains its original risk profile (i.e., aggressive, conservative, etc.). Rebalancing also allows investors to lock in gains from their successful investments or reinvest them to avoid paying a commission and increase their exposure to less-successful ones, which are likely to have depressed prices.
Rebalancing also provides a psychological benefit: it forces investors not just to think about their overall risk tolerance but also about the specific risks of each investment in their portfolio.
2. Long-Term Put Options
Put options are contracts that allow you to sell shares of stock at a guaranteed price for a set period. They can be used as a hedge to protect against large losses in the event of a market correction. Longer-term put options—those with expiration dates two or more years out—are more expensive than shorter-term options, but they may provide more significant protection. These options will expire worthlessly and expire worthless if shares increase in value. However, if stocks fall sharply, the investor can exercise the option, selling shares at their peak price
3. Invest in gold
Gold is one of the best investments when it comes to immunity from market volatility. They don’t lose value. So irrespective of what geopolitical conditions prevail you will always find the metrics such as today’s gold rate in Berhampur or for whichever city you want to be generally static.