Why you must pay attention to volatility when you invest

Julie Brownlee, Fsp Invest, 06 Jan. 2015

Tags: volatility, what is volatility, investing, volatility and investing, investments, risk,

When you invest, it’s easy to think about the potential riches you can make on the stock market. As much as making money is most likely your primary goal, you also need to consider risk.

So how can you look at risk when you invest? And why should it make a difference to how you invest?

Read on to find out…

How to measure risk when you invest

Professional investors tend to measure risk by volatility. This gives them a good idea of the level of risk attached to a particular investment.

Volatility measures how much the annual returns from an investment fluctuate around its long-term average. Professional investors do this using the asset’s standard deviation.

Volatility shows you how much of a rollercoaster ride an investment can give you. The bigger the swings in the asset’s price, the more volatile or risky the investment is.

What investments are volatile?

Looking at the historical performance of different assets, some are much more volatile (or risky) than others.

For instance, shares and gold tend to be very volatile. On the other hand, cash and bonds have low volatility.

Why volatility matters to you

Volatility is something you should consider when you invest. Being aware of an investment’s volatility can help you make the right decisions for your tolerance to risk.

For example, many investors close to retirement don’t want to have too much of their portfolio in shares. This is because if the market crashed, there’s a chance their investment wouldn’t recover in sufficient time.

Younger investors tend to hold more shares as they have time of their side to ride out any market crash.

Some investors may also move out of shares when the market gets expensive and hold their money in less volatile assets.

And it’s worth remembering, just because an asset is volatile, it doesn’t mean its returns are necessary higher.

So there you have it, why you must pay attention to volatility when you invest.

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