“Episodes like this tell investors a lot about their tolerance for risk,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management. “You need to be prepared for the market’s risks, particularly when it has reached all-time highs.” Haworth notes that in 2023 and 2024, investors enjoyed significant stock market gains, particularly among large-cap growth stocks. “As a result, growth in that portion of their portfolios results in some people owning too much of that type of stock. They should consider making an adjustment,” says Haworth. “On the other end of the spectrum, some very cautious people hold too much cash and should work to more actively invest it.”
Understanding what causes market volatility may help you better manage the emotions and behaviors that come with it. Let’s explore market volatility and what can help you ride the waves, such as a comprehensive financial plan.
What is market volatility?
Stock markets sometimes experience sharp and unpredictable price movements, either down or up. These movements are often referred to as a “volatile market” and can occur over a period of days, weeks or months.
While the term “volatility” applies to both up- and-down-market movements, investors tend to be more concerned about downside volatility.
It’s important to recognize that significant, short-term changes in the market tend to be temporary. It’s also notable that volatility isn’t necessarily all bad: When markets decline, opportunities may arise to find good value in specific investments that experience a short-term drop.
What causes market volatility?
While market volatility can happen with little warning, it rarely occurs for no reason. For example, a series of events seemed to contribute to the 2022 bear market.
- Surprising economic news that differed from the expectations of investors (in this case, a sudden inflationary spike).
- A sustained change in monetary policy, as the Federal Reserve announced plans to raise short-term interest rates in response to rising inflation.
- Geopolitical events such as Russia's invasion of Ukraine, creating a range of economic impacts with ramifications for global markets.