Market Volatility: Opportunity or Threat?

Volatility. A word that sparks fear in some and excitement in others. Depending on how you look at it, this shift in market momentum can either disrupt your portfolio or open up opportunities to profit. So, how do you handle it?

In recent weeks, we've seen a spike in volatility across global markets. For long-term investors and passive portfolio holders, this can feel unsettling. For those with a trained eye, however, these market conditions offer potential windfalls. The aim of this edition is to help you understand what’s really going on and how to position yourself accordingly.

What Is Volatility, and Why Does It Matter?

Volatility is simply a measure of uncertainty in the market. The more unpredictable the environment, the more volatility we typically see. Rising volatility often aligns with falling markets, while low volatility generally coincides with stable or rising markets.

And here's where many investors get caught out: volatility doesn’t always signal a problem. Sometimes, it’s a sign of opportunity.

What’s Driving the Current Volatility?

Let’s break down some of the most significant contributors.

1. Political Risk and Tariffs

The re-emergence of a tariff-heavy foreign policy in the US has created market tension. Under the new administration, trade partners face steeper tariffs, often without warning. In some cases, these have escalated to fivefold increases.

While the concept of ‘America First’ may make political sense domestically, its global market consequences are profound. Supply chains are disrupted. Business confidence wanes. Inflation creeps in. And the ripple effect is uncertainty, fuel for volatility.

2. Geopolitical Tensions

The situation in Eastern Europe and its public fallout has also spooked investors. What was expected to be a ceasefire announcement turned into a televised disaster, shaking confidence in diplomatic progress.

At a macro level, this reinforced the notion that stability, especially when it’s televised, can vanish in seconds. That uncertainty alone can add significant downside pressure to already jittery markets.

3. Market Self-Correction

The NASDAQ has rallied over 300% in the past five years. That’s a big run-up. A 10–20% pullback might be painful if you entered near the top, but it's also a natural breather after such a strong climb. Corrections are part of the game.

Fear of loss often causes investors to sell too quickly. But sharp sell-offs frequently present some of the best buying opportunities. Panic selling can create irrational prices. This is where educated investors step in.

4. Inflation and Interest Rate Policy

With tariffs pushing import costs up, inflationary concerns have returned. Higher inflation means the potential for higher interest rates, which the market dislikes. Investors want cheap borrowing, and central banks now face a dilemma.

Raise interest rates to control inflation, and you risk slowing the economy. Keep them low, and inflation could spiral. It’s a policy tightrope.

Adding to the confusion is the jobs market. Seasonal adjustments and policy-driven labour changes blur the picture. As jobless claims fluctuate, so does investor sentiment.

Indicators to Watch

Two key indicators often signal deeper issues:

• Yield Curve Inversion: When short-term yields exceed long-term yields, it's an unusual pattern and often a recession signal.
• Unemployment Rates: A sharp rise in jobless claims can suggest the economy is softening.

But these aren’t definitive. Context matters. Are unemployment shifts seasonal or structural? Is yield inversion driven by policy shifts or market panic?

How to Respond: The Psychology of Volatility

Many investors feel overwhelmed by uncertainty. That’s natural. What matters is how you respond. Pulling out of the market at the wrong time can mean locking in losses and missing the rebound.

Let me be blunt: these moments of fear are often when the best investment opportunities appear. Stocks that were too expensive two weeks ago are now on sale. It’s hard to see clearly when the dust is in the air, but the professionals are already buying.

Here’s what you can do:

• Think Long Term: This is a moment in your investing journey, not the full picture.
• Rebalance: Add to your holdings if you believe in their long-term value.
• Use Options: Selling puts can be an excellent way to get paid while positioning to buy quality stocks at lower prices.
• Buy Volatility: Instruments like VIXY and UVXY go up when volatility rises. These can hedge your portfolio.
• Protect With Puts: In bullish times, buying cheap protection can save you later. When volatility is low, it’s a great time to insure your portfolio.

Perspective From the Field

Conversations with other investors recently have followed a similar pattern. Nervousness. Uncertainty. Seeking guidance. And often, hesitation at the exact moment when they should act.

I spoke with someone just last week, total stranger over a cuppa, who was concerned about the downturn. I showed him how volatility products had doubled in value. With the right education, he saw the strategy clearly.

Volatility is not just something to fear. It can be traded. It can be used. It can be profited from.

Learning From Mistakes

Full disclosure—I hesitated myself. I’ve got birthday portfolios for my kids, and I delayed a planned buy. Market was red, and I paused. In hindsight, it was a buying window.

I’ll be deploying those funds now. Not trying to time the bottom. Just sticking to the plan. Because success in investing often comes down to consistency, not perfection.

If You’ve Taken a Hit, What Now?

Here’s how to recalibrate:

• Sell Puts: If you’re happy to buy at current levels, get paid to do it.
• Covered Calls: Generate income on what you already own.
• Use Protective Puts: This could’ve softened the blow. Learn for next time.
• Diversify: Consider ETFs over individual shares.
• Buy More: If the fundamentals haven’t changed, the discount is attractive.

Final Thoughts: Don’t Panic, Prepare

Market corrections are normal. They don’t feel good. But they’re expected.

If you’re long-term, you’re going to see 10–15% pullbacks. Probably every couple of years. That’s the cost of being in the market. The question is: how are you positioned?

If you're still unsure, build a support network. Work with people who can be objective when you're emotional. Or better yet, get educated. That’s your best asset.

To learn more about how to prepare your portfolio and your mindset for these conditions, grab a copy of our best-selling book at WealthPlaybook.com.au. It’s packed with strategies and checklists to help you move forward confidently.

Because in times of uncertainty, action with knowledge makes all the difference.