Broker Check
How To Think About Market Volatility

How To Think About Market Volatility

February 12, 2018
Share |

The image above illustrates why stock prices fluctuate.  As we receive new information on inflation, interest rates, corporate profitability, political events, and countless other issues, stock prices change to reflect the new reality.  Of course, we cannot predict how all these variables will interact and influence stock prices; sometimes it is positive, other times it's negative.  What we do know, however, is that over time we should expect to receive a fair rate of return for the risk we take.  But that risk is always present and prices can fluctuate significantly in the short run as new information -- often conflicting -- is incorporated into prices.

This would all be an irrelevant sideshow for long-term investors except that volatility can sometimes cause us to question whether markets are functioning properly or if it makes sense to maintain our investment plans or step aside (sell out) while issues are sorted out.  The video below is a helpful reminder from Dimensional Fund Advisors (DFA) about why it makes sense to stay the course and offers some helpful and encouraging statistics about the resilience of the stock market in the face of adversity.  Check it out!