Volatility is one of those concepts your clients hear often but rarely feel comfortable with. When markets swing sharply, they see their account values move and start to worry about what comes next.
In this article, Wealth Professional Canada will shed light on volatility and what causes it, about the types of volatility, and share the latest volatility news stories at the bottom, making it a great resource to share with clients or visit for yourself to see the latest volatility news!
In finance, volatility describes how much the value of a security or a market index moves around its average over a certain period. When prices move sharply up and down, we say that volatility is high. When prices move more gently, volatility is lower.
You can look at volatility in two ways. First, at the level of the entire stock market. Second, at the level of individual securities such as specific stocks or bonds. In both cases, the idea is the same. Volatility shows how large and frequent the changes in value are over time. Watch this video to learn more:
If managed well, volatility can create opportunities for investors.
Statistically, the most common way to measure volatility is through standard deviation. It's a way of seeing how far actual prices tend to move away from their average price over a set period. The bigger those swings, the higher the volatility.
A highly volatile stock is seen as risky because its price can move quickly in either direction. For your clients, that means it is harder to know at what price they could sell in the future. The resale value is less predictable, which makes planning more difficult.
Here are the two main types of volatility:
Historical volatility looks backwards. It measures how much a security's price has moved in the past. You take past prices over a chosen period and use those to calculate how much they fluctuated around their average.
This backward-looking view helps estimate how unstable a security has been. A history of large price swings suggests higher historical volatility. A more stable price path suggests lower volatility.
However, historical volatility does not tell you whether prices will move up or down in the future. It does not speak to direction. It only speaks to the intensity of past price changes. Markets can change, and past patterns might not repeat in the same way.
Implied volatility looks forward. It is most often discussed in the context of options. Here, volatility is not taken from past prices. Instead, it is inferred from the current market price of an option.
Option pricing models include volatility as an input. If you know the option's current market price and the other variables in the model, you can solve for the level of volatility that would make the theoretical option value match the actual market price. That inferred value is called implied volatility.
Implied volatility reflects what the market is expecting in terms of future price swings. When implied volatility is high, it means market participants expect larger price movements. When it is low, expectations for price changes are more muted.
In summary, historical volatility is rooted in past behaviour while implied volatility is a snapshot of current expectations about what might happen next.
There are four generally accepted factors can lead to sharp market movements, including:
Rising inflation can reduce the purchasing power of future cash flows from investments. When investors start to worry that inflation is climbing, they might adjust their expectations for interest rates, profit margins, and growth. Those shifting expectations can trigger more active trading and larger daily price moves.
Changes in interest rates, or even the hint of future changes, can influence volatility. If investors think central banks are likely to raise interest rates, they might reassess the value of stocks and bonds. This reassessment can increase trading activity and lead to sudden swings in prices.
Markets tend to react to the risk of recession ahead of time. When data suggests that growth is weakening, stock prices can start to fluctuate more, even before an official recession is declared. Investors adjust their views on company earnings and on how long tough conditions might last.
Events such as wars or geopolitical standoffs can generate uncertainty about trade, energy prices, and global growth. The COVID-19 pandemic is one example of a global event that triggered large daily moves in major stock indexes. In such periods, markets can swing by several percentage points in a single day as investors react to new information.
Short answer: yes. Periods of decline are part of investing in equities. Stock prices do not move upward in a straight line. They move in cycles, with stretches of gains, pullbacks, and sometimes sharp drops.
However, what history does show is that downturns have been followed by recoveries. The performance of the Toronto Stock Exchange between 1977 and 2021 illustrates that periods of sharp market declines have been followed by renewed upward trends.
Downturns, while uncomfortable, are part of long-term investing. The challenge is not to avoid every decline but to manage through them without abandoning well-thought-out plans.
A smart way to soften the impact of volatility on your clients' portfolios is through diversification. Instead of concentrating all assets in one type of investment, you spread them across different:
The idea is that not all parts of a diversified portfolio will react in the same way to a given event. When some holdings are under pressure, others might hold up better or even rise.
For example, bonds are generally less volatile than stocks. In a period of stock market stress, the bond portion of your clients' portfolios might fall less or even remain relatively stable compared to equities. This mix can reduce the overall decline compared to an all-stock portfolio.
You can diversify using both individual securities and diversified investment funds. Many funds are constructed to offer exposure to different segments of the market in one vehicle. This can be helpful for clients who would find it difficult to build and maintain a large set of separate holdings.
Check out this guide on how to achieve portfolio diversification.
For clients who are new to investing, volatile periods can feel like the worst possible time to begin. Prices are moving, headlines are alarming, and emotions run high. Yet, such periods can present attractive entry points for long-term investors.
When stock prices have declined, clients are able to buy assets at lower levels than before. If markets recover over time, buying during a downturn can enhance long-term growth. This applies both to those just starting and to those who have been investing for years and are still building their portfolios.
The critical point is to stay calm. Selling during a downturn locks in losses and removes the chance to participate in the recovery that often follows. Continuing to invest, even in smaller amounts, can help average out purchase prices over time and keep your clients aligned with their goals.
If your clients feel uneasy, this is a good moment for a conversation. Reviewing their strategy with them can reinforce why they hold certain assets and what steps, if any, should be taken. You should also consider their risk tolerance and time horizon.
Volatility is part of investing, not an exception. Markets respond to economic data, political events, company news, and investor behaviour. Sometimes those responses are muted. At other times they produce sharp price movements in short periods. To help your clients, you can:
Volatility will always be part of financial markets. Prices respond to inflation, interest rates, recessions, geopolitical tensions, and unexpected events. Sometimes those responses are mild. Sometimes they are abrupt and unsettling.
For your clients, what's important is not removing volatility altogether (which isn't possible, mind you) but learning how to live with it. When you understand how volatility is measured and what drives it, you can translate that knowledge into guidance that reassures instead of alarms.
In the end, volatility is not just a statistic. It is a test of patience, discipline, and trust in the investment strategy you have put in place with your clients. When you stay grounded in these principles, you can help your clients face market swings with a stronger sense of control over their financial future.
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