Stock Market Volatility: what it means and how to manage it

One thing every investor must get used to is that the stock market is constantly moving. Even in relatively calm periods, indexes like the S&P 500 fluctuate daily. But during more turbulent times, these swings can become more dramatic, creating both risk and opportunity for investors.

All those up-and-down movements can be encapsulated in one term: volatility. Let's take a look at what stock market volatility really means and how to build an investment strategy that can not only withstand it but potentially benefits from it.

WHAT IS STOCK MARKET VOLATILITY?

If you’re wondering what volatile means when it comes to stocks, “it has dramatic gains and losses” is a decent description, but volatility also reflects the frequency (how often) and scale (how much) of stock price swings.

Generally, greater expected volatility for a stock or group of stocks equates to more risk, but as we'll see, that’s not necessarily a bad thing. Neither volatility nor risk are one-way; they include potential opportunity and, actually, are the key to the power of long-term investing.

HOW IS STOCK MARKET VOLATILITY MEASURED?

STANDARD DEVIATION AND MARKET SWINGS

For either an individual stock or an overall stock index, historical volatility is measured as the standard deviation in its price swings over time. In other words, how wide is the range of daily returns, both positive and negative?

You can use this information about the past to give you a clue about the future (although as with everything in investing, nothing is guaranteed). Portfolios with a higher standard deviation tend to be more volatile and may experience greater movement up or down.

HIGH VS. LOW VOLATILITY

When a stock or index’s historical volatility is high, short-term returns are expected to fluctuate more significantly and with greater frequency. In contrast, when standard deviation is low, short-term returns tend to be more stable.

There’s no “good” or “bad” or “ideal” level of volatility. What you want to focus on are:

• Whether you’re comfortable with the expected level of volatility in your investments
• Whether you’re being adequately rewarded for the expected level of volatility in your investments

We’ll get to that below.

WHAT IS THE VIX (VOLATILITY INDEX)?

The VIX, often called the “fear index,” is the Chicago Board Options Exchange Volatility Index. Unlike a stock’s or an index’s standard deviation, it measures expected future market volatility – what professional traders think will happen in the short term. When the VIX rises, it typically signals increased investor uncertainty.

WHAT CAUSES STOCK MARKET VOLATILITY?

ECONOMIC FACTORS

The economy plays a big role in market volatility. When it’s humming along – inflation and jobs are stable, GDP is growing, consumer sentiment is high – there may be an extended period of time where the markets see a string of mostly positive, moderate growth that adds up to a smoothish line upward. Conversely, an economic downturn can cause a sharp decline in the market.

What really drives volatility – which, remember, is big moves in both directions – is uncertainty. When investors see conflicting information or don’t know what to expect next, the markets can get jumpy.

MARKET AND FINANCIAL SYSTEM EVENTS

The global financial system runs on money, so events that impact the availability of that money can drive volatility. And the interconnected nature of the financial system means that problems in one corner can quickly spread. “Problems” can include bad loans or other investments, increased difficulty getting loans because of tightening credit standards, spiking interest rates, runs on banks and cascading bank failures.

GLOBAL AND GEOPOLITICAL EVENTS

New government policies, trade agreements and regulations can have large impacts on the financial markets. But it’s not just legislation; events like supply chain disruptions, natural disasters, and wars – or even a pandemic – can also cause market volatility.

INVESTOR SENTIMENT AND BEHAVIOR

To some extent, high volatility is a phenomenon the market inflicts on itself. The professional investors that make up a large part of the market are constantly attempting to read tea leaves and take advantage of information before anyone else. When new information is plentiful, the markets can react by whipsawing up and down. When there’s no new or unexpected information, they often take a breather.

VOLATILITY VS. RISK: WHAT’S THE DIFFERENCE?

In some senses, volatility and market risk are pretty similar: Both have to do with the magnitude of price swings a stock or market might experience. As with volatility, downside risk (risk of loss) is paired with upside risk (chance of gains). If it weren't – if an investment only could be expected to go down – no one would buy it.

And as with volatility, there’s no right level of market risk. It’s a balance between how much you can stand to see your investments potentially fall and how much growth you need in order to reach your goals. Think of it like the risk of driving: The faster you go, the more likely you’ll get in an accident, but if you drive along at a crawl, you might not reach your destination in time. You may find a steady pace can be your comfort zone.

A helpful distinction for most everyday investors is that market risk is generally inherent. Even when markets are calm, they're still the same amount of risky. In other words, volatility is an expression of risk, but a lack of volatility doesn’t mean the risk has left the building.

IS STOCK MARKET VOLATILITY A BAD THING?

As unpleasant as it may feel, volatility can unlock opportunities. Big jumps up obviously have rewards for investors. But even when the market has down days, you have a chance to buy stocks “on sale.” Down days can also give you the opportunity for more sophisticated strategies like tax-loss harvesting.

HOW TO MANAGE STOCK MARKET VOLATILITY

DIVERSIFY

In general, the riskier a portfolio is, the more volatility it will see, both to the upside and to the downside. There’s not a whole lot you can do to try to reduce volatility without also giving up growth potential.

Diversification is an exception.

When you mix together assets that don’t move the same way all the time, you can reduce your portfolio’s volatility without giving up expected returns.

A portfolio of a thousand stocks is much more diversified than a single stock and therefore should be less volatile. You can reduce volatility further by making sure to include stocks from a variety of industries and company sizes, and those at different points in their growth cycles. And you can also diversify outside stocks by bringing in other asset types.

BUILD AN EMERGENCY FUND

Having an emergency fund won’t make your portfolio less volatile, but it can help reduce your worries about it by avoiding a situation where you have to sell stocks when they’re down. Short-term paper losses don’t hurt your long-term financial stability; real losses might.

REBALANCE YOUR PORTFOLIO

When you set up your portfolio, you should carefully choose the way it’s comprised based on the information we’ve talked about here: how much volatility can you handle, and how much growth do you need?

Market movements will do a number on your careful plan. After some time, your portfolio proportions will be out of whack, and so will your expected future growth. The more volatile markets are, the faster this will happen.

To get back to your plan, you’ll have to rebalance. This generally means you’ll sell things that have gone up faster in value (or fallen less) and buy things that have risen slower or fallen more.

AVOID THE URGE TO TIME THE MARKET

Timing the market means trying to sell when stocks are at their highest and buy when they’re at their lowest. And oh, how we wish it worked. Unfortunately, no one has a crystal ball, and by guessing when those low and high points have arrived, you’re likely to seriously damage your long-term financial health.

In fact, if you missed only the 25 best days in the global stock market from 2000 to 2025, you would have lost money. Those 25 days almost universally occurred amidst a sea of red days – so how could you have known about them in advance?

FOCUS ON LONG-TERM GOALS

In life, things that are valuable are often hard, and they take time. Reaching financial goals is no different.

Market volatility is temporary and doesn’t have a lot of meaning. If you throw in the towel whenever progress looks like it’s stalling, you'll never get there. Instead, focus on the strides you’ve made over time and the reasons you’re investing in the first place – the big picture.

CONSIDER WORKING WITH A FINANCIAL ADVISOR

It’s normal to feel concerned during times of volatility, but a well-balanced and diversified portfolio should be designed with these periods in mind. If you need help developing an investment strategy that accounts for market volatility, try partnering with a financial advisor. At Edelman Financial Engines, we use an integrated wealth management approach to help you develop a plan that suits your unique risk tolerance and goals.

HOW INVESTORS CAN FIND OPPORTUNITY DURING VOLATILITY

If you take only one thing away from this article, it should be that volatility is not your enemy. In fact, if it didn’t exist, investing would hardly be worth doing.

Instead of avoiding it, try thinking about fluctuations as an opportunity. But you’re unlikely to be able to take advantage of that opportunity without a strategy. These are some of the strategies we believe help you make the most of investing and volatility:

• Have a diversified portfolio to give you the best chance at capturing the most return for a given level of risk.
• Own a mix of assets that gives you a risk level (and expected volatility) you know you can mentally handle.
• Rebalance according to a set of rules. Rebalancing involves selling high-performing assets to buy lower-performing ones, so it’s likely to be uncomfortable. If you don’t have rules to tell you when to do it, you may keep putting it off and end up with a very risky portfolio.
• Invest extra money when the markets are down, or at the very least, keep investing on the same schedule. Look at it like a sale.
• Move money you’ll need soon into cash. You don’t want to be forced to sell at a loss simply because you need the money.
• If they make sense in your situation, consider strategies like tax-loss harvesting that can help you turn losses into tax savings.
• Unless you’re doing it as part of a preexisting strategy or plan, don’t sell. Ignore the markets if you have to.

BUILD A STRATEGY THAT CAN HELP YOU WEATHER MARKET VOLATILITY

Volatility is a natural part of investing, but having a plan in place can make all the difference. A financial advisor can help you develop a diversified, long-term strategy designed to help you stay on track through all kinds of changing market conditions.

FREQUENTLY ASKED QUESTIONS

WHAT CAUSES MARKET VOLATILITY?

Market volatility is most often driven by uncertainty about things such as economic conditions, legislation or global events that affect investor expectations.

HOW SHOULD I INVEST DURING VOLATILE MARKETS?

You probably shouldn’t change anything about the way you invest during volatility, assuming you have a portfolio with a risk level that works with your situation and risk tolerance. If that’s the case, volatility is expected and your portfolio is intended to withstand it.

IS MARKET VOLATILITY A GOOD TIME TO INVEST?

It can be. Volatility can create opportunities, especially for long-term investors who continue investing consistently or have new money to invest when prices are lower.

WHAT IS THE VIX AND HOW DOES IT RELATE TO VOLATILITY?

The VIX is an index that reflects expected near‑term market volatility based on options prices, often rising during periods of heightened uncertainty or investor anxiety.

SHOULD I SELL MY INVESTMENTS WHEN THE MARKET IS VOLATILE?

Selling during volatile periods can lock in losses and make it hard to benefit from recoveries. Staying focused on long‑term goals is usually more effective than reacting to short‑term moves.