Stock market volatility can make headlines and feel chaotic, but it often reflects investors adapting to shifting conditions. It can also be a time to take stock of your investment strategy and consider how well it’s positioned to support your long-term goals.
Investing in volatile times can be uncomfortable, but reacting impulsively can lock in losses and derail your financial plan. That’s why it’s important to stay grounded and focus on your priorities — like paying down credit card debt, building an emergency fund, and saving for retirement.
How Stock Volatility Works
Stock volatility is a measure of how much a security’s price swings from its average over a given period of time. There are a few different ways to calculate it. Historical volatility (HV) uses real-world data to determine how volatile a security has been in the past. This can be useful for predicting future performance, but it’s important to remember that past results don’t guarantee future returns.
Implied volatility, on the other hand, estimates expected future volatility. It’s based on expectations of future prices based on options pricing tied to the S&P 500 index. The CBOE VIX index, or “fear index,” is one popular implied volatility indicator.
Investors can also measure the risk of a specific stock by dividing its HV by its annualized standard deviation, or variance. This calculation gives you an idea of how much of the stock’s price movements can be explained by standard events versus other, more unique events.