Investing on the stock market? You need to understand volatility…

Julie Brownlee, Fsp Invest, 23 Nov. 2015

Tags: volatility, investing, investing in stocks, volatility and the stock market, risk, investment risk,

Investing on the stock market is riskier than putting your money into bonds or a savings account.

Historically the stock market has rewarded investors for taking on this higher level of risk.

But how can you measure volatility? And what difference does it make to you as an investor?

Read on to find out…

What is volatility?

Volatility is one way to look at the risk you take on as an investor.

Volatility looks at how much an investment bounces around its long-term average over a 12 month period. Analysts use the standard deviation to measure this volatility.

Generally speaking, volatility shows you how much of a roller coaster ride an investment goes on. A highly volatile investment will have greater annual ups and downs than a less volatile investment.

How assets rank on the volatility scale

Looking at the past performance of different assets, some are much more volatile than others.

For instance, stocks and gold are very volatile, but bonds and cash are less volatile. Simply put, the risks are higher with stocks and gold over bonds and cash.

Volatility is something you need to pay attention to when putting your money to work. You should aim to invest in investments that suit your tolerance to risk, and volatility is one way to check this.

For example, if you’re close to retirement, having a large portion of your funds in stocks may not be the best idea as you don’t have time to wait for a market recovery if the stock market crashes. This is why many investors approaching retirement reduce their weighting in stocks and increase their weightings in safer assets like cash and bonds.

So there you have it. Why you need to understand volatility is you’re investing on the stock market.

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