If you pay any attention to the stock market, you probably know that volatility is actually a normal part of investing.

Stock market volatility is a measure of how much the stock market’s overall value fluctuates up and down. A stock with a price that fluctuates wildly—hits new highs and lows or moves erratically—is considered highly volatile. A stock that maintains a relatively stable price has low volatility. according to Investopedia.

Stock market volatility is most commonly measured by standard deviation, which is a measure of the amount of variability around an average. The larger the standard deviation, the higher the volatility will be.

Volatility is often associated with fear, which tends to rise during bear markets, stock market crashes, and other big downward moves. However, volatility doesn’t measure direction. It’s simply a measure of how big the price swings are. You can think of volatility as a measure of short-term uncertainty.

“Keep it simple and avoid complications in the markets.”

• Sooner or later, most investors realize that the stock market is actually a ‘market of stocks’ that is chaotic, dictated by investors’ emotions of fear and greed, and influenced by interest rates and macro economic conditions. Good stocks don’t always advance. Bad stocks don’t always fall. Reality is rarely ever as bullish, or as bearish, as forecasted by financial analysts and strategists.

What is certain is that a quasi-invisible force known as volatility is always always present, threatening to disrupt the market’s delicate equilibrium and sanity.

“One of the hardest parts about being a long-term investor is the fact that sometimes your money is going to get incinerated and there’s nothing you can do about it.” Barry Ritholtz

Investors have a few primary ways to respond.

• They can sit tight and act like long-term investors. Time tends to reward such behavior, though research has shown that it is as difficult to practice as it is uncommon.
• Most investors never hold stocks long enough to benefit from the fact that the market rises over time. Investors typically buy too late and sell too early. They routinely “greed in” and “panic out” of stocks. They hold stocks for just a few years — or worse, a few months — rather than carefully curating a portfolio over decades, which means most investors behave like salmon swimming upstream. They struggle against the stock market’s natural rhythms.
• Rotations is when smart and retail money runs after gains in certain sectors until a rally there becomes exhausted, and then their money runs to other sectors.
• Investors can use options to more effectively navigate the stock market. A well-placed put or call can make all the difference in an uncertain market. A well-placed options contract can turn the unpredictably of investing into a defined outcome.
• There are two types of options. A call option gives investors the right to buy a stock at a certain price and time. A put option gives investors the right to sell a stock at a certain price and time. An easy way to remember the difference between puts and calls is that a call gives you the right to “call in” a winning stock, while a put gives you the right to “put off” a bad stock on someone else.
• Investors buy puts when they want to protect stock that they own from losing value.
• Investors buy calls when they want to own a stock they believe will increase in value.
• Many investors sell puts and calls to generate income.
• Many people pick options that expire in three months or less. When you buy an options contract that expires in a year or more, you spend more money because time equals risk.
• Simplicity is everything. It’s important to keep your trading strategy simple and avoid complications in the markets. Since everything could change tomorrow, or not, and thus we fall back on something we learned during the dark days of the 2008-09 financial crisis: Focus on the facts that have held up over time

Consider keeping a list of stocks or exchange-traded funds you would like to buy during market sell offs or crashes.

When in doubt, always remember: “Bad investors think of ways to make money. Good investors think of ways to not lose money.”

To keep from panicking when stock market volatility ticks up, it’s important to realize that volatility comes with the territory when you decide to invest. The stock market will always have its ups and downs, and there’s no use trying to predict what’s going to happen. So if you’re investing for the long term, consider basing your decisions on your goals. timeline and tolerance for risk, rather than on what’s happening in the markets from one day to the next.

Also, remember that being diversified is one way to help manage your exposure to volatility. By spreading your money out over various asset classes you’re also spreading out your market risk, and ensuring your portfolio’s results aren’t based on the performance of one type of investment.

References:

1. https://www.fool.com/investing/how-to-invest/stocks/stock-market-volatility/
2. https://www.barrons.com/articles/how-to-buy-and-sell-options-without-making-a-fool-of-yourself-51600336811
3. http://www.barrons.com/articles/how-to-use-options-to-beat-the-market-1477415121
4. https://awealthofcommonsense.com/2021/05/sometimes-you-just-have-to-eat-your-losses-in-the-markets/