2020 was a brutal reminder of the power of market volatility. Our ISAs and pension savings plummeted as the world ground to a halt and markets came to terms with the nature of the pandemic. Markets fell fast and far, with massive falls often on consecutive days.

All this brought a 11-year rising bull market to a very abrupt end. Markets fell by about a third, a reminder of the old saying that shares ride the escalator up but go down in the lift.

Roll-on 18 months and - from an investment perspective at least - things look a whole lot better. The severity of the falls was matched only by the speed of the recoveries.

Global losses were made up a mere five months after they bottomed.

Last year served as a reminder that investments will inevitably fall at times, but they can also recover, though of course this isn’t guaranteed. It also showed that price fluctuations can offer savvy investors the chance to scoop up bargains.

So: is market volatility actually a bad thing?

Volatility is a natural part of investing

I found learning to drive less scary once I understood how the gears worked. Volatility is no different. Knowing what’s really going on when prices wobble makes it far easier to keep a level head.

When we talk about market volatility, people tend to think of downward trends in prices. It’s what we associate with seeing a lot of red over our portfolios in place of the accustomed green.

Really, volatility refers to swings in either direction, up or down, that deviate from the norm.

Because people tend to focus on the falls more than they do the gains, volatility gets a bad rep. Yet price fluctuations - and the risks that come with them - are the cornerstone of how markets work.

Volatility helps keep markets efficient. If companies are failing, we want our money redistributed to best reflect the opportunities out there.

Moreover, making money on financial markets relies on price movements. Prices rise and fall all the time, but in volatile markets, those movements happen more quickly. It’s at moments like these - usually during periods of high anxiety or uncertainty - that volatility really catches our attention.

During the pandemic, everything looked up in the air for a while. It was natural for investors to grow concerned about the prospects of the assets they owned, and for markets to subsequently fall.

Seasoned investors know that volatility is part and parcel of investing, but for the less experienced, those falls were scary. Many panicked and decided to sell their holdings before things dropped further - thus exacerbating the crash.

It’s an understandable instinct, but the price you pay for selling amid volatile markets is locking in your losses. One of the key principles for investors to remember is that the longer you hold an investment, the more likely it is to deliver a positive return. By moving too quickly out of assets, you risk missing out on their recoveries.

For those who sold amid last year’s volatility, that lesson hit particularly hard. The speed with which markets rebounded from their spring lows drove home the pain of crystalising their losses.

Those who remained stoical in the face of adversity were able to ride out the markets lows and see their portfolios recover strongly.

Some not only resisted the urge to sell, they saw an opportunity to buy.

That’s where volatility can get interesting - If you know what you’re doing, you may be able to use it to your advantage.

To buy or not to buy

The positive case for volatility is simple. When prices go down, things become cheaper. This creates opportunity.

The savviest stock pickers make the best of falling markets by picking out good companies, whose fundamentals remain strong but whose prices are nevertheless falling.

That’s why periods of widespread volatility can be the most fruitful. The contagion of fear can spread to good companies as well as bad. If you had your eye on a stock which you were reluctant to buy because of the high cost, volatility can open a previously closed window.

Of course, ensuring that the stocks and funds you buy retain their quality is key. Volatile markets are inherently riskier - here more than ever it’s vital that you’re buying for the right reasons, and not just because something looks cheap.

Avoid trying to time the market. We often say that selling when prices are highest and buying at their lowest is a near impossible art to master. But that’s quite a different thing from recognising opportunities when they present themselves. Those who use volatility to their advantage still maintain a long-term view - by holding onto their investments they give them the potential to recover - but also appreciate when prices are abnormally low.

Stay diversified

Ultimately, whether you’re looking to exploit periods of market volatility or to simply get through them unscathed, there are ways all of us can prepare beforehand.

Second-guessing when volatility will strike is far from easy, which is why making sure you don’t keep all your eggs in one basket is key.

Having a mix of assets from shares and funds to bonds and cash, across different sectors and geographies, is the best way to ensure that one spell of volatility doesn’t take your entire portfolio down with it. Spreading your assets means sharing the risks and is an essential for any investor.

One simple way to do this is by investing in a multi-asset fund like the Fidelity Select 50 Balanced Fund. Funds chosen for inclusion in this fund are mostly taken from Fidelity’s Select 50 list of favourite funds. They range across a mixture of assets classes and geographies, offering investors easy access to a diversified portfolio of holdings.

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. The Fidelity Select 50 Balanced Fund uses financial derivative instruments for investment purposes, which may expose the fund to a higher degree of risk and can cause investments to experience larger than average price fluctuations. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Currency hedging is used to substantially reduce the risk of losses from unfavourable exchange rate movements on holdings in currencies that differ from the dealing currency. Hedging also has the effect of limiting the potential for currency gains to be made. The Fidelity Select 50 Balanced Fund investment policy means it invests mainly in units in collective investment schemes. There are just a few fixed limits for the three core elements in the fund. These are 30% to 70% for shares, 20% to 60% for bonds and 0% to 20% for cash. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.

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