Volatility and risk are two terms that are often confused. For many would-be investors, these words strike fear into the heart, conjuring images of plummeting stocks and lost life savings. The real picture, however, is far less dramatic – and much simpler to understand. While volatility reflects the changeable nature of the stock market, where stocks rise and fall during periods of economic stress or uncertainty, risk refers to the prospect of selling your stocks for less than you bought them. What often sets these two apart is the length of time you’re willing to wait to recoup your investment, and what rate of return you’re hoping to achieve.
Is volatility a good thing?
How do you measure volatility?
Playing the long game
In order to profit from volatility, you will invariably need to stay invested for a number of years. Investing over a period of 10 years or more tends to result in considerable growth – often much more so than cash investments, which can struggle to keep up with inflation. With these long-term investments, it’s important not to focus too much on individual swings up or down, as panic selling when prices are low will turn volatility into risk instantly. Even in periods of great economic strain, such as a recession, investments can still ultimately increase in value over time.
Risk and return
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