Volatility Index Rising: Should You Buy Stocks Now or Wait? | personal financing
In calm markets, the volatility index is generally somewhere around 10. In the recent market turmoil, the index touched the 30s. The volatility index measures how quickly the market expects stock prices to change. The higher the index, the greater the expected fluctuations in prices.
This rise in the volatility index raises a key question: Should you buy stocks now or wait? As simple as asking this question, the answer depends as much on you as an investor as it does for the stocks themselves.
You should be able to focus for the long term
High volatility indicates that stocks are expected to move aggressively – sometimes up, sometimes down. When this volatility is combined with the bear market we are in, there is a very real risk that there will be more aggressive moves to the downside. As a result, it is very important to have a long-term focus with any money you wish to invest in the market and be able to.
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After all, if you buy and the shares you later buy go down, you will have less total net worth than you would have if you had just held the cash. It can be a very frustrating feeling, as if you are spending good money after bad.
However, with a longer-term focus, you can better understand that when you buy shares and they go down, you still have the same number of shares – and therefore share ownership – as you did before. In addition, it becomes easier to learn how to invest the same number of dollars after, after Stock crashes buy more shares than I did Before collapse, which helps the new money to go much further.
A reasonable evaluation estimate also helps
Speaking of converting dollars into stocks, investing when volatility occurs Many Easier if you have a good appraisal tool, such as a discounted cash flow model, by your side. Using the discounted cash flow model, you can estimate how much cash the company will generate in the future. Then, you can call (or debit) that cash flow based on how much you expect the company to earn in the future. Add those discounted cash flows and the total will be your estimate of what the company is worth.
You’ll never get perfect—you anticipate the future, after all—but if you do your homework and really strive to understand the business, you can often come close reasonably well. The power of reasonably approaching is that sometimes, sharp market volatility in a bear market drives a company’s stock Much less Your estimate of its fair value. When that happens, you can pounce and buy shares for less than you think they are worth.
Turning a volatility-driven market crash into a bargain expedition is an opportunity to take advantage of a highly volatile market, one that you usually only get when the volatility index is high.
Diversification reduces impact when you go wrong
Of course, there is usually good reason for a market crash and a high volatility index. In this case, it is a combination of risks of stagflation and rising interest rates. This combination can make it very difficult for weaker companies to survive. It can also radically throw off your reasonable valuation estimates, as rapidly increasing costs can seriously tamper with a company’s ability to make money.
As a result, it is very important to spread your investments across multiple companies in different areas. This way when (not in the event of) one of your investments failing, losing that investment will have a much smaller impact on your overall portfolio than it would if that company were the only company you own.
Put it all together and you’ll have a path to buy even when volatility is high
It is scary to invest when the market is down and volatility is high. With a combination of long-term focus, decent valuation, and diversification on your part, you have at least a chance to turn it in your favour. It is not easy to invest in times like these, but history suggests that if you are able to, you will likely be successful on the other side. So make today the day you have these tools in your arsenal and be well prepared to invest despite the increased volatility.
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Chuck Saletta does not have a position in any of the stocks mentioned. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.