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Stocks certainly have high volatility in the market, you never know when the stock that you invested in last month would come down in the blink of an eye in the coming month. That’s what volatility is all about, it depends on the sentiments of the market.
As highly volatile as the stock market can be, the bond market has low volatility in that case. It doesn’t put you in a nightmare when you sleep, and neither does it put you in a shock when you browse through your application in the early morning.
This means it’s highly unlikely the bond market can put you in a dilemma that is pathetic for your psychological stimulation for that instance.
Having said that let’s go through what volatility means to the bond market and learn how stock market volatility can help you to leverage the bond market to invest as you read through.
What is volatility in the stock market?
The up-and-down trend that you generally see is the price swings. So the larger the price swings, the larger the volatility. On a technical note, it is more like the standard deviation of the price changes seen over some time.
During a year the average volatility you can expect in the stock market is about 15% and once in five years is about 30% down.
The best thing the investor should follow would be to not sell during a huge market dip in panic but most often people end up doing it. The general trend is seen in a bearish market with drastic volatility and whereas in a bullish market, you can expect low volatility.
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How does the volatility look in the bond market?
The volatility in the bond market can generally be seen in interest rates and it works differently compared to the stock market. The interest rates and bond prices are interconnected. Let’s learn about this a bit before moving ahead to the volatility.
Bond prices and interest rates are inversely linked to each other. Here is how it works, basically the bond prices are fixed initially before you purchase the bond, and it comes with fixed interest. When the market interest rates increase the bond prices decrease and similarly when the interest rates fall the bond prices increase.
Well how does that work, suppose you bought a bond at a fixed interest rate, then you may ask how the bond prices will fall. To answer that, when a new bond arrives in the market and is offering higher interest rates to the same face value, then the value of your existing bond will decrease, which means the price of your bond decreases.
Similarly, if you ask how will the bond price increase, it works the same way too. When there is a new bond for the same face value but is selling at lower interest rates, then the existing bond price will increase, as the bond that you hold is worth more when you sell it.
Interest is the only concern in the volatility when you consider the bond market. This would leave us in the last part of this section.
What is Green Fixed Deposits?
What you can consider?
Note that, when stock prices have fallen, it’s the right time to invest in the bond market as the bond prices rise. It’s not true in all cases, as not all bonds will rise with falling stocks. It leaves us to think of diversification in this regard. Bonds regardless of any situation can turn out as a positive thing to balance out your portfolio. This wouldn’t leave your portfolio in “Reds” but in “Greens” for sure.
Are Capital Gain Bonds Helpful?
