What is volatility?

04 February 2020 / Published in Your Money

Sometimes share markets and investments make the headlines. Shares can go up or down as companies respond to things like trade tariffs, people buying more or less of their product, or when they get caught up in controversies.

You might even see these movements reflected in your investment balance, as it rises or lowers. The word “volatility” is often thrown around in the coverage of these events, but if you’re new to investing – or someone that only checks your investment balance now and then - you might not know what that means. Here are some things to keep in mind when the news cycle picks up.

What is volatility?

Volatility is the term used to describe the movement in value that a share, a bond or any other type of investment can have over time. For example, if a company is performing well, the value of its shares can increase. Conversely, if something unexpected or negative happens that value can fall. These changes can happen slowly or all at once, and sometimes for no good reason at all, so it can be hard to keep up. When things do go south in the markets though, you can be sure you’ll hear about it.

Often overlooked when the stories of market declines start reaching the business sections or popping up in your social feed, is that markets go up and down every day. It is important to know that longer dips do happen from time to time though. Prices go up and down, sometimes by a little and sometimes by a lot, as markets go through change or political events influence the economy. If the market falls by 10% from its former high point, it’s referred to as a “correction”. That may sound scary, but the S&P 500, an index made up of leading American-based companies, has experienced on average a correction every two years since 1928.1 Market volatility and corrections aren’t a question of ‘if’ but ‘when’. We will continue to see periods of volatility in the future, that's a fact. However, it’s

important to not lose sight of your investment timeframe and personal investment goals when this happens.

Another way to look at Volatility

Say you’re a student sitting exams. It’s unlikely you’re going to get perfect marks every time. Many things can influence your results; how much you studied, how well you slept the night before, whether you had your morning coffee before walking through the doors. But if you don’t do well in one exam, it’s not the end of the world. Your overall grades might move up and down throughout the year, so it’s important to keep the big picture in mind. A dip in the markets is like getting a lower score than usual in an exam or assignment. Take a deep breath and ride it out. You don’t drop out of school because of one tough history essay.

What can I do about it?

You can improve your chances of good grades by studying hard and getting enough rest, but how can you decrease your chances of being negatively affected by market volatility?

When it comes to investing, one of the best ways you can reduce the impacts of volatility is through diversification. This is where someone spreads their money between several different investment types or asset classes, rather than putting everything into just shares or bonds, property or cash. It’s the investing equivalent of not putting all your eggs in one basket. If one asset class falls in value, your other investments may not experience the same loss. It’s important to remember that different asset classes carry different degrees of risk, but more volatile asset classes often carry the potential for greater long term returns.

If your main form of investing is in managed funds like ASB KiwiSaver Scheme or ASB Investment Funds, then the allocation of assets will depend on the type of fund you’re in. Conservative funds invest in a greater portion of income assets, more stable investments like cash and bonds, whilst growth funds invest in a greater portion of growth assets like shares. There’s no right or wrong here, as your choice in fund should depend on your overall goals and investing timeframe. How volatility will affect your investments should be correctly aligned to the fund you are in. Just remember to keep that big picture in mind when the news cycle starts talking about how the market had a bad day.

If you’re an ASB KiwiSaver Scheme or ASB Investment Funds member, you can review and manage your investment with FastNet Classic internet banking and the ASB Mobile app. If you’re not a member, you can easily join or transfer on our website.

To check if you’re in the right ASB KiwiSaver Scheme fund for your goal, try our Help Me Choose tool here.

This document does not have regard to the financial situation or needs of any reader. As individual circumstances differ, you should seek appropriate professional advice.

Returns are a reflection of past performance and are not a guarantee or indication of future performance because returns fluctuate (move up and down). Returns can be negative and you may receive back less than the total amount of your contributions.

Interests in ASB Investment Funds and the ASB KiwiSaver Scheme (‘the Schemes’) are issued by ASB Group Investments Limited, a wholly owned subsidiary of ASB Bank Limited (ASB). ASB provides administration and distribution services for the Schemes. No person guarantees interests in the Schemes. Interests in the Schemes are not deposits or other liabilities of ASB. They are subject to investment risk, including the loss of income and principal invested. For more information see the Schemes Product Disclosure Statements, available from the register of offers of financial products at www.business.govt.nz/disclose, (search for either ASB Investment Funds or ASB KiwiSaver Scheme).

1. https://www.yardeni.com/pub/sp500corrbeartables.pd


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