By Allison McDonald-Sordo, Investment Advisor TD Waterhouse Private Investment Advice

Any one that has been invested in the equity markets over the past 18 months is very familiar with market volatility. The actual text book definition of market volatility is as follows; Volatility: a statistical measure of the tendency of a market to rise or fall sharply within a short period of time. A highly volatile market means that share prices on a specific index have large swings in very short periods of time. The term volatility can also be used to describe the rapid and sharp price swings of an individual stock. It’s important to remember that first, market volatility is normal and to be expected,  and second, that when viewed in the shorter term, financial markets may appear dramatically volatile, but they become less so as you extend your time horizon.

Investing during periods of market volatility can be challenging, especially when you’re enduring the kind of volatility we have experienced over the past 18 months.

Common investor behaviour when faced with short-term market volatility is to act in haste based on fear and anxiety, buy just before or at the market peaks, and sell just before or at market bottoms.  In his book “Simple Wealth, Inevitable Wealth”, Nick Murray relates a story about Warren Buffet experiencing a decline of over $6 Billion in the value of his personal shareholdings of a particular company from July 17 to August 31, 1998.  Even though he experienced a decline he didn’t lose any money – because he didn’t sell.  He had no need to withdraw his capital, he apparently had great faith in his holdings of this company, he had equally great faith in the long term trends of the world economy and he refused to panic.  The moral of the story is that temporary decline does not spell loss!

Advice for the investor in a volatile market:   Be patient with the marketplace and your portfolio.  Focus on your long-term investment objectives & avoid hasty decisions. By spreading your investments among the different asset classes, you can reduce your overall risk and increase your growth potential. For example, a portfolio with a mix of safety, income and growth investments may capture much of the growth of the stock market, but with less volatility than an all-stock portfolio.

Since it is common to act on emotions, it’s important to sit down with a wealth professional and openly discuss your fears and concerns.  

I hope I have managed not only to define market volatility but helped to ease some of your concerns with how all this market volatility is effecting your investments.  In our next discussion, I’d will discuss whether or not, now is a good time to be investing and if so, how you should get started.