Risk and Volatility

It seems that everyone is obsessing about ‘attitude to risk’ and ‘capacity for loss’, two phrases that probably mean very little to a normal investor. The verb risk is defined as “Expose danger harm loss”. So how do we apply that in investing?

Well, it seems we have focused on volatility as the proxy for risk. (Volatility is defined as “Liable to change rapidly and unpredictably, especially for the worse”). So not really the same at all! In fact, when we measure volatility in financial services, we measure the upside as well as the downside. To show how that works, here are the same Strategic Solutions Portfolios, valued daily (as you can sell them daily if you wish), Monthly (a very short investment period) and Quarterly (still a very short investment). The volatility of the first one (daily) is far higher than the second and third ones, but they all carry the same level of risk!

As we always recommend that investments are held for 3-5 years as a minimum to iron out market blips in the short term, it is a shame that investors then become so focused on the very short term price fluctuation.

We all know that investments can go down as well as up and that past performance is no guide to the future, we should also learn to ignore the very short term noises the markets make and treat our investments like we do our houses – as a long term commitment. Taking professional regulated advice is key.

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