Simply turn on any news channel, from Ireland's RTE to America's CNN, and all the way back to Britain's BBC, and there is a reverberating similarity in their messages. Geopolitical conflicts, economic variables, inflation pressures, and investor sentiment are casting a cloud of uncertainty over the market. Uncover strategies to fortify your investments and navigate this volatile global economic environment.

In the world of investing, understanding market volatility is akin to trying to stand upright on a surf board at Mullaghmore Head while navigating the wild Atlantic waves crashing down around you. Recently, the Irish share market entered what experts call a “market correction”. To put it simply, Investors have feared a looming recession and market correction in recent years. A market correction is a term used in finance to describe a relatively short-term, downward movement or decline in the prices of financial assets. A market correction differs from a recession, bear market or crash thanks to its shorter and relatively less severe — when an asset declines in value by at least 10% but less than 20%, it’s considered a correction.
It’s clear that the Irish investors the market is experiencing a bout of uncertainty. Market volatility is a factor every investor encounters sooner or later. Let's take a closer look at what market volatility is and how to reduce risk for your investments.

What is market volatility?

Market volatility refers to the natural fluctuations in the value of financial assets over time. It’s a reflection of the dynamic nature of financial markets and can be influenced by various factors, including economic conditions, geopolitical events, and investor behaviour. Recognising that volatility is an integral part of the investment landscape is the first step in making informed decisions.

The Factors contributing to market volatility

Geopolitical conflicts

When international conflicts, like the Israeli ground invasion of Gaza, arise, they can increase geopolitical risks in the Middle East. If a more extensive war involving major players like the Iran and Saudi Arabia unfolds, it could disrupt the global economy and cause a sustained shock in oil prices. These geopolitical events can have a significant impact on financial markets.

Economic context

It’s essential to consider the broader economic context. For example, during the Gulf War, the U.S. experienced a recession. Similarly, the U.S.-Iraq war in 2003 occurred after the tech crash. Currently, the conflict in Israel is happening as U.S. bond yields reach their highest levels since 2007. These economic factors interact with geopolitical risks, further affecting market returns.

Policies and regulations

Government policies and regulations, such as tax changes or new financial regulations, can affect corporate profits and trade dynamics. Sudden or unexpected policy changes can introduce uncertainty and disrupt financial markets, leading to a sudden influx of investors taking profits.

Inflation

Inflation refers to the general increase in prices of goods and services over time. High and accelerating inflation can be a concern for financial markets because it erodes the purchasing power of money, leading to decreased corporate profits. When investors anticipate rising inflation, they often demand higher returns on their investments to compensate for the loss of real purchasing power. Central banks may respond to high inflation by raising interest rates, which can further impact financial markets and economic activity. The COVID-19 pandemic led to economic stimulus and border reopening in late 2021. This resulted in some of the highest inflation rates in decades. Inflation can be problematic because it erodes the value of your money and investments. Now, with a full scale war in the middle east looking more prominent , the price of petrol and international politics are at stake. All of these factors point to one thing: the possibility of higher interest rates for a more extended period.

Market Behaviour

Investors are human just like you and like all humans, they become cautious during volatile times and may temporarily sit on the sidelines, avoiding active trading. This behaviour can reduce market activity and add to the overall unpredictability. For example, if bonds offer a better return with lower risk compared to equities (stocks), some investors may shift their investments from stocks to bonds. This can affect the overall performance of the stock market.

How to reduce risk from volatility

Embracing the long term

A key strategy in dealing with market volatility is adopting a long-term perspective. Younger investors have the advantage of time on their side. A long-term perspective allows you to leverage the benefits of compound interest and ride out short-term market fluctuations. In the bigger picture, these temporary swings are of lesser significance compared to your overarching financial objectives.

Diversify your investments

Another key strategy to mitigate the impact of market volatility on your investment portfolio is diversification. Spreading your investments across different asset classes, such as stocks, bonds, and real estate, can help maintain stability during turbulent times.

Avoid impulsive decisions

Market volatility often triggers emotional responses. Investors may experience stress and anxiety, leading to impulsive decisions. Crafting a well-thought-out financial plan and staying informed can help you keep emotions in check, ensuring rational investment decisions.

Get professional guidance

Getting professional advice is often sensible to mitigate risk from market volatility. A financial advisor can offer expert guidance tailored to your unique circumstances and goals. They can help you develop a long-term, well-diversified financial strategy that helps you navigate market volatility. They can also help to keep you on course to reaching your goals and take the emotion our of your investment decisions.

Navigating the uncertainty

In summary, market volatility is influenced by a complex interplay of geopolitical conflicts, economic factors, inflation, and investor behaviour. It can be unsettling for investors, especially those nearing retirement. However, it’s important to keep in mind that market volatility is a par for the course when investing. Those who are not experts in this minefield will gain not only a greater return, but greater comfort having the guidance of a Financial advisor in the corner. Having a well-diversified, and long term financial strategy, will help you stay on the board even when the wild Atlantic waves are raging.