Risk and Volatility are Not the Same
Part 1 of this month’s discussion will focus on risk vs. volatility. This month is the start of a new year and with a new year comes new beginnings and new opportunities to make the most out of your financial services team at Grover Financial Services. We are getting back to basics this month. Join us for our month-long discussion.
Risk vs. Volatility
Understanding the difference between market volatility and market risk is a foundational skill for investors to obtain. Volatility can be described as how rapidly or severely the price of an investment may change, while risk can be described as the probability that an investment will result in a permanent loss of capital.
When it comes to investing, risk, and return go hand in hand. Investors like you get rewarded for taking on risks, but sometimes those risks result in losses. Losses can be permanent or temporary. Volatility is commonly used as a substitute for risk, but it is just one kind of risk investors can face. Other kinds of risks investors can face include counterparty, liquidity, credit, inflation, horizon, and longevity.
Volatility refers to the dispersion of returns of an asset. In layman’s terms, it refers to the amount an asset’s price or value goes up and down. Volatility changes over time. These changes are generally gradual. Since no one has figured out a way to predict the future, we use historical volatility to indicate the likelihood of future volatility.
Liquidity is one type of risk investors may find themselves grappling with. Just because your investments are liquid, does not mean that their values are stable. This is where volatility can become a threat to your wealth. In the world of financial planning and investing, there can be what some would describe as moving targets.
In order to keep your head on straight during tough times, it helps to separate risk from volatility. They are not the same thing. Volatility in investing is often temporary, but it can bleed into risk if you do not know yourself as an investor. This is essentially because market volatility can become emotional. When you let your emotions into your investments and financial planning, it would be like transferring one problem to replace another. It is not sound planning.
This is where your financial planning team at Grover Financial Services can play a significant role in your life. We pride ourselves on creating financial plans and investment portfolios that work for you, your goals, and your level of comfort when it comes to market volatility and taking risks.
Stay tuned for part 2, where we will dive into diversification, asset allocation, and rebalancing!
P.S. If you enjoyed what you've read here and found it beneficial, we encourage you to share it with your friends and family. I firmly believe that an educated investor is more confident, which leads to healthy finances and fewer sleepless nights