Risk and Volatility

Financial Planning Most Overworked & Misunderstood Words

Is it Risk or Is it Volatility?

 

Risk is defined as a probability or threat of damage, injury, liability, loss or any other negative occurrence that is caused by external or internal vulnerabilities that may be avoided through premature action.

Investment Risk is defined as the probability of loss associated with an investment objective.

Fluctuation is defined as the relative rate of which the price of an investment moves up and down. If the price of an investment moves rapidly over short periods of time it has high volatility. If the price almost never changes if has low volatility.

Investment Risk can be attributed to about 7 different causes. Those being Market Risk, Inflation Risk, Interest Rate risk, Liquidity Risk, Marketability Risk, Time Risk, Financial Risk or Default Risk.

The financial services industry media & most advisors tend to ignore the foregoing real risks & mistakenly focus on volatility.  They refer to it as risk, thus creating unnecessary investor anxiety.

Fluctuation on the other hand isn’t loss, its oxygen. With oxygen you will live, and make money without it you will die. Investments that cannot fluctuate are not investments they are savings. The long term return on savings after inflation & taxes is always near zero or less.

Fluctuation only becomes a loss if you panic & sell – thus the risk. Markets don’t lose money for people, people lose money for themselves. To ensure a successful investment plan with the goal of creating wealth there are a few tips to follow:

  1. Tune out the media noise. It is all focused on the immediate & is destructive to positive long term results.
  2. Let volatility or fluctuation be your friend, use it to your advantage.
  3. Don’t buy what you want to buy for the moment but rather buy what you need to buy for the rest of your life.
  4. Have faith. Hire professionals & let them work on your behalf.

For more information or discussion do not hesitate to contact Gordon French at Professional Investments 1-888-548-8868 or GFrench@pro-invest.ca