Let’s take a look: What do volatility and risk mean in terms of your investments?
Volatility – is when trading prices for a given security or market index fluctuate up or down, indicating uncertainty or risk in the amount of change in a security’s value. In other words, securities may go up and down in a volatile market. A higher volatility means the price of the security may change dramatically over a short time period, in either direction. A lower volatility means that a security’s value changes at a steady pace over a period of time. The volatility of a stock or bond does not necessarily have to equate with its risk or return.
Risk – is the uncertainty of achieving a specific goal or outcome due to certain variables with investments. Every saving and investment product involves some degree of risk. An example of risk is that you may be forced to sell at a loss if you need the money during a market downturn.
So how does a skittish investor go forward knowing that market volatility is normal? Historically markets have always gone up and down, and if history repeats they will continue to fluctuate well into the future; and yes, sometimes wildly.
We must understand an important difference between an investment’s volatility and its risk. If money is needed in the immediate future, then volatility could be a concern to an investor. But a volatile investment does not necessarily mean it is riskier in the long-term. When an investment’s time horizon is longer, the effect of volatility tends to be reduced. As an investor, you should be aware of how short-term volatility may affect your investments and plan accordingly.
Remember, market volatility is not necessarily a bad thing and will most likely continue to be a pattern in the markets. But by plotting a steady course over a long time frame, along with establishing a diversified portfolio that matches your risk profile, you may realize the benefits of investing in the market.
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