Investing comes with risk.
But global events like the COVID-19 pandemic can cause extreme swings in investment markets, leading to stock market volatility.
You may have heard this term in recent months, but do you know what it means for your investments? In this post we look at what market volatility is, some factors that can cause markets to become volatile, and how you can navigate a volatile financial period.
What is Market Volatility?
Market volatility is defined as the rate at which the price of assets on that market change over a period of time. If the price has been fluctuating, or in other words, it quickly rises and falls in unpredictable ways, the asset is considered highly volatile. Alternatively, an asset price that remains stable has low volatility.
How Investor Behavior Can Impact Market Volatility
Investor behavior can play a role in stock market volatility. The price of a stock is largely determined by supply and demand. More specifically, the demand to purchase stocks and the desire to sell them. Demand can be influenced by investors’ beliefs, attitudes, expectations, and news events, which means that investor behavior has a hand in shaping stock prices.
Markets can also be driven by how investors react to global events. This is evident when you look at how the COVID-19 pandemic is impacting financial markets, as we describe below.
Knowing that investors can have an impact on the state of investment markets, it’s important to create good investing habits that will help you make informed investment decisions. One of the first steps is to understand your financial self, which includes knowing your risk tolerance. You could also consider working with a registered investment advisor or another financial professional to help you create a tailored plan.
How COVID-19 Has Impacted Financial Markets
This is not the first time a global health crisis has caused extreme market swings. From 2003 onward, investors have dealt with stock market volatility brought on by SARS, Swine Flu, MERS, Ebola, and Zika.
These global health crises have caused fluctuations, and each downturn was unique.
So far, we’ve seen the following economic impact as a result of the COVID-19 pandemic:
- Canadian businesses closing shop and gradually re-opening to curb the spread of COVID-19, which has impacted the economy in unprecedented ways
- Oil futures prices drop to historic lows
- The influence of investor behavior and attitudes on specific stocks. For example, airline stock prices became volatile due to travel bans and advisories in various countries
- The TSX dropped off significantly in March 2020. At one point in March, the TSX was down over 30% from its peak one month earlier
At this time there is no vaccine, natural health product, or other treatment authorized to treat or protect against COVID-19. Until there is a treatment for COVID-19, and investor confidence rebounds, volatility in financial markets may continue.
How to Navigate Stock Market Volatility
Below are a few ways you can navigate your investments when there is market volatility.
Revisit Your Short- and Long-Term Financial Goals
During volatile periods, keep your financial goals in mind. The COVID-19 pandemic may have shifted your short-term and long-term financial goals, so it’s a good time to revisit, and potentially re-calibrate, some of your money goals to fit your financial situation.
Checking in with your financial goals will also help you track your progress and give you a refresher on what you have set out to achieve.
Understand Your Risk Tolerance
Your risk tolerance is how willing or comfortable you are to lose money on an investment. Your risk tolerance will be unique to you and your financial situation, and is based on a number of factors. These include your time horizon, cash requirements, and even emotional factors, such as how you would react to changes in the value of your investments.
Making investment decisions according to your risk tolerance is part of being an informed and engaged investor.
Talk To Your Registered Investment Advisor
If you work with a registered investment advisor, think about the questions you’d like to ask about your investment plan and have a conversation with them. If you don’t have an investment advisor but are considering working with one, use our four-step advisor check to conduct your own background check.
If you manage your own investments, make sure you have a solid understanding of what’s happening in the markets, and that you’re making decisions according to your risk tolerance and financial goals.
Keep an Eye Out for Investment Scams During Market Volatility
Fraudsters will use economic uncertainty as an opportunity to rope investors into schemes. In fact, certain types of investment scams have popped up during the COVID-19 pandemic.
Although investment scams may be packaged in various ways, they usually have similar warning signs. Learn to recognize the fraud warning signs, and become better equipped to avoid and report investment fraud.
It’s important to do your due diligence when you’re presented with an investment opportunity. Here are a few tips that could help you determine whether an investment checks out.
- Look into the company or individual offering the investment. You can do so by using SEDAR, Canada’s central filing system for public companies. Running a search on SEDAR can help you find financial statements and other documents that public companies are required to file.
- Seek out independent investment advice. It can help you determine the legitimacy of an investment if you run it by a registered investment advisor or another financial professional. Learn more about working with a registered advisor.
- Check to see if an individual or company has been involved in misconduct. The BCSC has tools that can help. Search for names of BC individuals and companies on the Disciplined List and the Investment Caution List, and stay informed about the latest Investor Alerts in BC. You can also contact us directly if you have questions.
Report a Concern
If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using BCSC’s online complaint form.