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Is a Volatile Investment a Risky Investment?
There are times when the short term outlook of an investment or a whole class of investments, like a stock market sector, becomes uncertain. At that time the investment becomes volatile with its price fluctuating rapidly up and down. Many conservative investors choose to avoid such investments because they (the investments) seem risky. But, is a volatile investment a risky investment? Part of the answer depends on the time frame of you investing. If you try to time the market, jumping in and out, you may realize huge profits in a volatile market and you may simply lose all of your investment capital. By in large a volatile investment is a risky investment if you only focus on the very short term. But, what about the long term risks of a volatile investment?
Confusing Risk and Volatility
Reuters writes that we should never confuse risk and volatility.
Of the many lazy and dangerous ways of thinking about investment these two rank near the top: that risk equates with volatility and that risk and rewards are a straight trade off.
Both are overly simplistic and both lie at the heart of some of the most colossal errors in recent finance. And while both contain large amounts of truth at their core, both concepts represent shorthand versions of reality rather than tools which always, or even usually, work.