6 Investment Terms Everyone Should Know in This Unpredictable Market
Most experts believe investing is vital to creating a financial plan that allows your money to work for you over time. With the market currently experiencing major fluctuations, those who are new to the investment game may be feeling worried about all of these new words being used to describe everything that’s going on (I know I am). So I asked Katie Perry, General Manager at Public.com to provide a breakdown of the key words you need to know right now.
News pundits and other financial gurus have been throwing the term “volatility” around a lot lately. While it may sound scary, Perry says it’s important to understand the phrase when it comes to assessing risk. “Just like anything that can be described as volatile, volatility in investing lingo is when prices jump around and seem unpredictable, and not necessarily tied to normal-feeling reasons,” she says. She adds that you can use the term to mean overall volatility or volatility within a given asset. “For example,” she says, “stocks that have recently experienced significant increases or decreases in price (i.e., volatility) may be riskier than stocks that have lower recent volatility.”
Much like in sports, a rally can a good thing in the world of investing. When stocks rally, it means they have rebounded or risen in price in a short amount of time and following a period when prices were flat or declining.
Risk tolerance is determined by how much risk you’re willing or able to take on as an investor. “Setting aside how much risk you can stomach emotionally, if you’ve got very little financial wiggle room, then you’ve got low-risk tolerance,” Perry explains.
A lot of different things can impact your risk tolerance, according to Perry, including how much time you have for your investments to grow, how much you expect your income to grow, your current and future forecasted expenses, and your health status. “If you have a big salary and years until retirement then you have a high-risk tolerance; if you’re living paycheck to paycheck then you have low-risk tolerance.”
You’ve probably heard the saying “don’t put all of your eggs in one basket.” That’s a great way to think about the word diversification. “The idea behind diversification is that having a variety of investments can yield a greater return while assuming lower risk,” Perry says, adding that it’s good to consider diversifying across several different areas, including industries, company types, and even other attributes.
Long-term Investment Strategy
When it comes down to it, Perry says a long-term investing strategy means you’re prepared to endure the bad times and that you have a plan for the good times. “How you go about doing those things can include a variety of tactics, and you’ll usually learn more about what works best for you over time.” People with long-term investment strategies are likely less bothered by day-to-day market fluctuations and focused more on how things look over longer stretches of time.
Bear vs. Bull Market
One of the more alarming things newbie investors are likely curious about is the changeover from a bull market to a bear market. “Ultimately, we use the terms bear and bull market to loosely explain investor sentiment and how the stock market is performing,” Perry explains, adding that a bear market is defined as a point in time in which the market is seeing challenges and investor sentiment is on the decline, whereas a bull market is when the market is doing well and growing at a steady pace. “In a bull market, investor sentiment is optimistic and stock prices rise significantly following a previous decline,” she says.
So which type of market are we in currently? According to Perry, only time will tell. “Until lately, the general consensus was that most major indexes were in a bear market for the past few months,” she says. “But following a rally in the stock market at the beginning of [August], there is a debate about whether we’re now exiting the bear market and entering a new bull market.”