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Is a Volatile Investment a Risky Investment?

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http://profitableinvestingtips.com/bond-investing/is-a-volatile-investment-a-risky-investment

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.

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Is a Volatile Investment a Risky Investment?

  1. 1. B y w w w . P r o f i t a b l e I n v e s t i n g T i p s . c o m Is a Volatile Investment a Risky Investment?
  2. 2. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing There are times when the short term outlook of an investment or a whole class of investments, like a stock market sector, becomes uncertain.
  3. 3. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing At that time the investment becomes volatile with its price fluctuating rapidly up and down.
  4. 4. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Many conservative investors choose to avoid such investments because they (the investments) seem risky.
  5. 5. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing But, is a volatile investment a risky investment?
  6. 6. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Part of the answer depends on the time frame of you investing.
  7. 7. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-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.
  8. 8. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing By in large a volatile investment is a risky investment if you only focus on the very short term.
  9. 9. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing But, what about the long term risks of a volatile investment?
  10. 10. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Confusing Risk and Volatility
  11. 11. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Reuters writes that we should never confuse risk and volatility.
  12. 12. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Of the many lazy and dangerous ways of thinking about investment these two rank near the top:
  13. 13. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing that risk equates with volatility and that risk and rewards are a straight trade off.
  14. 14. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Both are overly simplistic and both lie at the heart of some of the most colossal errors in recent finance.
  15. 15. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing 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.
  16. 16. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Over the long term of an investment, the only reason to fear volatility is if it threatens to result in permanent loss.
  17. 17. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing We have written about long term investing and how five to ten years is an appropriate time to put money into a promising investment.
  18. 18. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing One of the reasons for this time frame is that investments can be volatile and market timing is always less than perfect.
  19. 19. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Investors who choose the most risk- free investments always give away the potential for greater profits.
  20. 20. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing When we wrote about how to invest without losing any money, we wrote about these investment vehicles, in order of lesser to greater risk:
  21. 21. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Bank deposits with Federal Deposit Insurance US Treasury Bills, Notes, and Bonds
  22. 22. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing  Investment Grade AAA and AA Bonds  Long term value investing based on intrinsic value assessment
  23. 23. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Within any investment portfolio there should always be a place for these investments.
  24. 24. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Then, when a person needs money, they will not need to sell a stock, for example, when the market has just crashed.
  25. 25. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing By in large, the closer one gets to retirement, the more conservative should be one’s portfolio.
  26. 26. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Nevertheless, there will always be a place for long term investment in stocks and others investment vehicles of which short term volatility is normal.
  27. 27. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing When Are You Willing to Accept the Risk?
  28. 28. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Some of the most spectacular profits in real estate, bonds, or stocks come from buying in a depressed market and selling when prices return to normal.
  29. 29. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing The problem is that many times there are extremely valid reasons why an investment has lost value.
  30. 30. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing CNBC writes about bond investors buying risky high yield junk bonds.
  31. 31. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Many are betting that the mid-range volatility that has taken bond prices down will result in an upward swing in the reasonably near future and certainly before some of those bonds go into default.
  32. 32. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing This is a matter of market timing and is a valid reason to equate volatility with risk.
  33. 33. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing Anyone who is an expert in buying and selling bonds is welcome to engage in the business of picking up junk bonds at the right time.
  34. 34. http://profitableinvestingtips.com/bond-investing/simple-steps-to-successful-investing But, anyone who does not have a clue about market timing in this sector needs to avoid investing in an area where they have not knowledge or expertise.

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