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What is volatility? Volatility is a term commonly used in the financial industry. This volatility is used to describe a major change, either in the form of rising or falling conditions in the price of a financial asset in particular. This happens over some time.

Definition of volatility

So what is volatility? In a sense, volatility is a statistical measure that shows the spread of returns in a particular security or market index.

In general, the greater the volatility, the greater the risk of an investment product or asset. In addition, volatility can also be interpreted as an indicator of financial market stability.

Volatility can also be understood as market sentiment. As discussed above, conditions of high volatility are generally responded to by a sharp fall or rise in prices. When volatility is low, it means that financial market conditions tend to be calm. So that neither buyers nor sellers dominate the trade.

In the securities market, on the other hand, volatility is a term associated with large changes occurring in both directions. For example, if a stock index rises or falls by more than 1% in a rather short time, the stock market can be said to be volatile or exhibiting volatility.

This volatility is typically calculated by investors by considering several factors. Including stock prices in the past to perform historical calculations. To calculate volatility, you typically use variance and standard deviation.


Causes of Volatility

Now that you know what volatility is, the following question may arise, what causes volatility? Well, many things can cause volatility in financial markets.

Generally, volatility is caused by natural catastrophes, economic and political conditions, a company’s performance, and industry and sector factors.

In terms of economic and political factors, this is because the government plays an important role in influencing market conditions. This can be seen from the fact that until the new law is passed by the DPR, the government that is allowed to make policy in a country can influence the financial market conditions.

In addition, the President’s speech on the election situation can also be a factor that triggers market volatility. Then the presence of economic data in the form of inflation data, data on economic growth, or the GDP rate announced per quarter can also influence the market performance.

On the other hand, certain events related to certain industries or sectors may also cause volatility conditions. For example, in the oil and gas sector, extreme weather events occur in key oil production areas. This condition can cause oil prices to rise. This also causes the stock price of companies related to oil distribution to rise, which is expected to be profitable, while the stock price of companies that have high oil costs in their business may experience a decline.


An investment strategy under volatile market conditions

Of course, there has to be a certain strategy when the market is faced with this volatile situation. The current world financial market is still in a volatile state. However, based on the sentiment in the country, shows optimism in the process of Indonesia’s economic recovery in 2022. Indeed, to support a stable financial goal, an investment strategy is required, especially when the market is volatile. One possibility is to reorganize the investment portfolio.

Global pressure is currently still having a strong impact on the domestic financial market. Three main factors still affect the world market, namely inflationary pressures, interest rates, and economic growth. Therefore, investors need to understand these three main factors when assessing the situation and investing.

Meanwhile, domestically, at least six factors are signaling a strengthening of the Indonesian economy. Consisting of relatively controlled inflation, Indonesia’s position as a net exporter of commodities, the important role of the new economy, Indonesia’s economic growth, and attractive valuations of financial assets to foreign ownership, which tends to be low.

Investors who want to take advantage of the growth opportunities of the domestic market can use investments through equity funds. Investors’ portfolios should remain diversified through additional allocations to low-risk investment instruments.

For example, through fixed-income mutual funds and money market mutual funds. Additionally, investors must also anticipate volatile global market conditions. Regarding the number of investment placements in equity funds, the money market, and fixed-income securities, it is necessary to adapt to the needs of each investor. By considering factors in the form of investment objectives, investment horizon, and liquidity needs, which are closely related to risk appetite.

Because knowledge of current market developments and adjustments to the composition of the portfolio should enable investors to continue to achieve their various financial goals in the future. Also, make sure to always have patience and precision when monitoring investment portfolios. This patience means you are mentally prepared to deal with market conditions and how they affect your investment.

If you need to follow multiple signals and have a plan for the money, you should always have cash on hand to buy assets when the market is moving down. When a major downturn hits you need to be prepared by raising cash to avoid large losses that will crash your portfolio.

The downturn will indeed pass and you should have money on hand to amass a good investment at a lower price. If you can do this, you will invest wisely during these difficult times and you will benefit.

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