Want to know how risky an investment is? You need to look at its volatility

Julie Brownlee, Fsp Invest, 26 Sep. 2014

Tags: volatility, what is volatility, risk, investment risk, standard deviation, investing,

Different investors have different appetites for risk.

For example, one investor may be happy putting some money into trading single stock futures. This carries a lot of risk. Whereas another investor may opt to invest in bonds. This carries a low risk.

So how can you measure investment risk?

It all comes down to the volatility of an investment.

So what exactly is volatility? And how can you use it to make investment decisions?

Let’s take a closer look…

What is volatility?

Volatility is a measure of investment risk.

What it does is show you how much an investment’s annual returns bounce around their long-term average.

You can work this out by calculating the standard deviation of returns.

The more drastic the annual ups and downs of an investment are, the more risky or volatile that investment is.

What investments are volatile?

Looking back, shares and gold are very volatile investments. Cash and bonds, on the other hand, are less volatile investments.

For instance, think about shares. You can invest in a company, then some bad news comes out, either from the company or about the general economy, that hit the shares hard. This can cause its share price to jump about, up and down.

Whereas, if you have cash in a savings account, you know that in two months’ time, you’ll have the same amount in the bank, with perhaps interest added on top of that.

Why understanding volatility can help you make investment decisions

By understanding volatility of different investments, you can use that knowledge to avoid investing in unsuitable vehicles that don’t suit your tolerance for risk.

For instance, if you’re nearing retirement, you probably don’t want to hold a lot of your wealth in shares. That’s because if the stock market crashed, you don’t have long enough to wait until those shares recover.

Yet a younger person can afford to put more money into shares as they have the time to let the stock market recover.

So there you have it. If you want to know how risky an investment is, you need to look at its volatility.

*********** Recommended Product ************

How would you like to WIN R100,000 trading the stock market?

If you've ever dreamed of living the life of a high-flying trader - And earning a consistent income from the stock market - NOW is your chance!

Join the R100,000 Traders Challenge today and we'll:

  • teach you how to trade - even if you've never bought or sold a stock before
  • give you a FREE trading account to hone your trading skills
  • and give you a chance to win R100,000 in REAL MONEY
That's right! The top three traders by the 30th of November 2014 will take home a combined R100,000!

So what are you waiting for? Click here and become a high-rolling trader today!


Related QA

d.c.heger asked:
MY QUESTION IS – I bought Bitcoin & Etherium some time ago – at first they grew nicely but now they are lower than what I paid for them. Should I [read more]
Published at 04 Apr. 2018 in: Investing 5 shares due to rocket 1 Answer
kavesh.maharaj.73 asked:
Hi Josh. I would like some advice on TFSA. I can get an interest rate of 7.8% nominal at a bank if I invest the R33k upfront in a fixed deposit [read more]
Published at 19 Mar. 2018 in: Investing Tax free savings vehicle 2 answers
kavesh.maharaj.73 asked:
Hi Josh Quantum wants to buy back shares from shall investors at what I think is a low price of around R3.86. You tipped the share in February [read more]
Published at 14 Mar. 2018 in: Investing Real wealth 5 answers
elizastrydom asked:
Hi Timon I am interested in registering for your Red Hot Storm Trader service. I am already a Red Hot Penny Shares investor. My question is [read more]
Published at 28 Feb. 2018 in: Investing Trading platform and broker 1 Answer
ManuE asked:
I have an interest in investing in Bitcoin, I just don't know how. If I buy Bitcoin with R15 000, how much can make (Return On Investment)? [read more]
Published at 25 Feb. 2018 in: Investing Investment 1 Answer

Related articles: