The Investment "Games": Volatility vs. Risk

One day the stock market is up 500 points, the next day the stock market is down 500 points. Oh my God. You may be thinking this is too much risk for me. I don't wanna be invested in the stock market. My name is Laura Rotter of True Abundance Advisors, and I'm making this video to explain the difference between volatility and risk.

Volatility is the range of price movements of a single security or a set of securities like the Dow Jones Industrial Average or the S&P 500. Risk, on the other hand is the possibility of an investment losing money. And a bedrock principle of investing is that the greater the risk you take in an investment, the higher the expected return should be.

Keep in mind, however, that all investing involves risk.  And frankly, if you keep your money under your mattress, you have the risk of losing purchasing power. That is the risk that prices go up because of inflation higher than your assets increase.

Risk can be minimized through asset allocation and through diversification. You can minimize your risk by not holding all your assets in stocks, but allocating some of your assets to bonds and other assets, commodities alternatives.  and you can diversify within these asset classes. So you might say, I own stocks, and you're just owning technology companies.

You need to diversify, to own stocks in many industries and to own stocks in other countries, not only US, but international and emerging markets. So remember in the short term stocks exhibit a lot of volatility. The prices can go up and down on a daily basis, but the intrinsic value over time should grow as the economy grows and should smooth out.

So the best thing to do is to understand your risk tolerance. Set up an asset allocation, diversify within that allocation, and stick to it over time unless your life changes as opposed to reacting to stock market volatility. I'd be happy to discuss your portfolio and evaluate its risk and whether or not you are comfortable with that in a conversation.

Please reach out to me if you'd like to have one. I look forward to speaking with you and helping you to live your life on purpose.