The myth
News and media portrayals can make investing seem like a high-stakes activity where prices go up and down every hour or even every few minutes.
While this can be exciting for some, it might also scare off people who prefer to stay on the safe side, especially when it comes to money. They may believe their money is better off uninvested and kept in a bank account instead.
The reality
The value of an investment can go up or down because of changes in supply and demand. If a lot of people want to buy something, its price usually goes up. If more people want to sell it, the price often goes down.
There are many reasons for supply and demand to change. These include economic events like adjustments in inflation and interest rates, geopolitical factors like wars and trade tensions, and company or industry-specific news like earnings reports and consumer demand for certain products and services.
The degree and frequency of price fluctuations is called volatility. Some investments show more volatility than others.
For example, stocks tend to be more volatile than bonds. That’s because there is a relatively wider variety of factors that can affect the value of a stock, including a company’s performance and how the larger economy is doing.
These factors can also be unpredictable, creating uncertainty around a stock’s value. On the other hand, bonds are relatively more stable since they typically offer fixed returns on a predetermined schedule.
While changes in interest rates can affect bond values, fixed-income assets like bonds still generally provide a higher level of certainty than stocks do.
High volatility isn’t always a bad thing. Since stocks pose elevated risks, they may also offer higher returns than “safer” investments.
Volatility can also be a sign of strong interest in an investment, as more people are willing to buy and sell that asset. This can create liquidity, which makes it easier to sell an investment when you need to.
Some people also try to take advantage of the up and down movements by buying and selling assets quickly.
However, if you’re the passive type who would rather let money grow over the long term, day-to-day price trends shouldn’t matter too much. What’s more important is an investment’s growth potential over the next decade or longer.
Verdict: True.
Price fluctuations are part of how investing works. Different investments pose different levels of risk, which is determined by their volatility.
How much volatility is too much for you? The answer depends on your risk tolerance and how soon you’ll need to take money out of your investments.
You can take a risk assessment to see which products suit you best given your risk tolerance and goals.
If you plan wisely and make decisions with your unique situation and goals in mind, price changes don't have to be scary—they're just part of the journey.
