Investing comes with risk. Global events such as wars, natural disasters, and pandemics are factors in investment risk – they can cause extreme swings in investment markets, leading to stock market volatility.
You may have noticed that from time to time the value of your investments fluctuates, and might be wondering what does it mean for your portfolio in the long run.
In this article, we look at what market volatility is and some factors that can cause markets to become volatile. You will also find strategies that can help you navigate a volatile financial period.
What is Market Volatility?
Market volatility is defined as the rate at which the price of assets on a market change over a period of time. If the price has been fluctuating, or in other words, it quickly rises and falls in unforeseen ways, the asset is considered highly volatile.
How Investor Behaviour Can Impact Market Volatility
Investor behaviour can play a role in stock market volatility. The price of an investment is often determined by supply and demand. More specifically, the demand to purchase investments and the desire to sell them. Demand can be influenced by investors’ beliefs, attitudes, expectations, and news events, which means that investor behaviour has a hand in shaping prices.
Markets can also be driven by how investors react to global events. This is evident when you look at how the war in Ukraine 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 profile. You could also consider working with a registered investment advisor or another financial professional to help you create a tailored plan.
How Recent Events in Ukraine Have Impacted Financial Markets
The war in Ukraine has introduced new uncertainty to global stock markets that have already been affected by COVID-19-related swings over the last two years.
So far, we’ve seen the following economic impact as a result of the war:
- The influence of investor behaviour and attitudes on specific investments with business exposure to Russia.
- Unprecedented sanctions on Russia have disrupted and influenced global financial trade.
- The global distribution of energy products has been greatly impacted, while the prices soared.
- Disruptions related to agricultural goods produced in the region, especially wheat, are having an impact on global food prices.
- Increased geopolitical tensions raise the possibility of further economic disruptions.
Besides causing market volatility, the current events may put additional inflationary pressures on investors due to higher commodity prices. Keep an eye out for an upcoming article explaining inflation in more detail.
How to Navigate Stock Market Volatility
Below are a few ways you can navigate your investments when there is market volatility.
#1. Revisit Your Short- and Long-term Financial Goals
During volatile periods, keep your financial goals in mind. Unexpected events 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.
#2. Understand Your Risk Profile
Your risk profile is a measure not only of your willingness to accept risk but also your ability to lose money. Your risk profile 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.
#3. 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 profile and financial goals.
Our new Investor Guide can help you explore working with a registered advisor, as well as other money management options, in more detail.
Keep an Eye Out for Investment Scams During Market Volatility
Fraudsters will use major events, crises, and economic uncertainty as an opportunity to rope investors into schemes.
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 the BCSC’s online complaint form.