Investment guide

Understanding market volatility and how to manage it

What is market volatility?

Markets experience a natural cycle of ups and downs. Market volatility is a term used to describe the degree that prices are moving up or down at a particular time versus the average extent of such ups and downs. Where there is high volatility, this indicates that a lot of movement up or down is occurring at that particular time.

Volatility may also be used when describing a particular investment and comparing it to other types of investments. If an investment is described as more volatile this means that it has the potential to experience greater fluctuations in its value.

Factors that can affect markets

There are several factors that can affect markets. Some factors affecting markets can include economic factors such as high inflation, industry trends, market sentiments, and unexpected events like natural disasters, war, and pandemics. At a company level, a news announcement or a statement about its performance (like either failing to meet or meeting expected profits) can affect demand for shares in that company.

All these factors can influence an investor’s decision to purchase or sell their investments. When several investors experience the same sentiments, either to purchase or to sell, the greater volume of transactions can affect market prices.

Investor’s emotions can also have a big impact on markets in the short term. When markets are trending downwards, some investors may fear they will continue to trend downwards, which can result in them selling their investments to minimise future losses. Alternatively, some investors may purchase more investments when the price drops low enough as they think it is good value. They will start to buy more investments as they believe that prices may rise again over time from that level.

It's normal to worry about losing money on an investment and feel the need to do something about it right away. But it's crucial not to panic and take the time to think things through before taking any action. 


What’s happening in the markets now?


There are numerous factors at play in the market at any given time and change is constant. For an update from our investment team about what's happening in the market, check out our market commentary.

Can my investment balance go down?

Yes. All investment funds have some degree of risk, and your balance can go down. The degree of risk depends on where the investment fund sits on the risk and return scale. Put simply, the lower the risk the lower your potential return and vice versa, the greater the risk the higher your potential return.

Types of investment funds and market volatility

Which investment funds you are invested in determines how much your investment account is likely to be affected by market volatility.

Higher risk funds, which tend to be invested largely in growth assets (such as shares in a company) are generally associated with larger movements up and down in the value of an investment. Funds on the lower end of the risk scale often have a larger allocation of investments to income assets (such as cash and bonds) and therefore historically experience small movements up and down in the value of an investment. 

The higher on the risk scale the fund you are invested in, the greater the potential for the value of the fund to fluctuate. However, they may potentially generate better returns over the long term when compared to a lower risk fund. Lower risk funds are known typically to provide more consistent but lower returns over the long term.

No one can predict every event that may affect investments and understanding what level of risk you feel comfortable with is key in navigating your investment options. The level of risk associated with your chosen fund(s) can provide you with insight into the typical levels of market ups and downs you could expect to see in your balance. In any fund you may invest in, the value of that fund may rise and fall, and returns may be negative from time to time. 

Ways to handle market ups and downs

Diversifying your investments

Diversification helps you manage your investment risk by putting your eggs in lots of different baskets. One of the many benefits of investing with AMP is that your money is typically invested in all sorts of assets, sectors and markets all around the world. Diversifying can help to protect your investment, as while the value of some assets might drop, the value of others may increase.

Investment goals and timeframes

Before you choose the funds you'd like to invest in, it's a good idea to think about what you want to achieve and by when. Knowing your investment goals can provide you with a good starting point and help you lay down the foundations of your investment strategy.

When it comes to investing, usually the more time you have the more risk you can think about taking. For long term goals, think 10+ years, you may be comfortable with investing in higher risk funds that have more exposure to shares. This gives you the time and space to make back any potential losses and benefit from compounding returns. For short and medium term investment goals that you'd like to achieve in 1-10 years, you might be more inclined to invest in more conservative or balanced funds that allocate a higher proportion of investment in cash and bonds.

Knowing your investment goals and timeframes is important. Once you've determined these two factors it will help you understand your risk appetite as an investor.

Risk appetite

Your risk appetite is how comfortable you are seeing market volatility potentially affect your investment balance. Market ups could see your investment balance grow while market downs could see your investment balance decrease. Having long-term investment goals can provide you with more time to ride out market ups and downs that can come with higher risk funds.

It's important to think about your investment goals, timeframes and risk appetite to understand whether you're still comfortable with the level of risk you're taking. If market ups and downs are continually playing on your mind, your risk appetite may have changed and perhaps it’s time to rethink your investment strategy.

To help you understand your own attitude toward risk, you can seek financial advice or work out your risk profile at

Changing investment strategy when markets are volatile

When markets fall sharply and you see your account balance dropping, you may be tempted to change your investment strategy. It's important to remember that moving to a lower risk investment fund will likely lock in any losses you’ve experienced, as you’ll be withdrawing your money or switching funds when prices are lower. Switching from high risk to low risk funds could also see you missing out if there is a market recovery.

If you want a comparison, would you rush to sell your house when the value of your property drops? You‘re probably more likely to wait for the value to bounce back before selling. However, it’s not necessarily wrong to realise your losses – it all depends on your personal circumstances and your attitude to risk. It’s an individual decision that’s best to get some expert help with.

Looking to invest?

At AMP, we offer a range of investment options that may suit you. Because everyone's needs are different, you should always seek financial advice or other professional advice relevant to your personal financial situation. For financial advice, we recommend you contact your Adviser. If you don’t have an Adviser, contact us on 0800 267 5494 or find an adviser online.

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