In any investment, there is always going to be a certain amount of risk. That’s the nature of the business. However, some markets or sectors can be volatile, which means they are prone to having rapid and often extreme changes. Some markets have a much higher volatility level than others, which can create opportunity for the patient investor but they can be bad investments for the emotional one.
The investment horizon of an investor is key to when encountering volatility. In long term investments, volatility is expected, and met with a much lower risk than short term investments. On the other hand, there are short-term investments instruments used to counter volatility. Over a long period of investment, the market is expected to fluctuate and eventually there is confidence that it will revert itself to a mean and closer to its intrinsic value over the course of a lifetime. However, in short term investments, a volatile investment carries a much higher risk if you are in and out of the market due to the short space of time in which you can make corrections or the market balances itself out. Volatile markets are quite normal however, and experts are expecting them to become even more commonplace as time goes on. Most people who are investors look at the stock value on a day-to-day basis or weekly, rather than seeing the bigger picture and the long term consequences. This means the people with investments in a market that has become quite volatile often pull out due to fears that their investment will crash and they will suffer huge losses. However, a market becoming volatile over the course of, say, 20+ years is completely normal. If you remain focused on the end goal, and get less bogged down in the nitty-gritty day to day stuff then you are much more likely to receive a better return.
If you are interested in investing in the market but don’t like the idea of investing in something which could potentially become volatile then there are things that you can do. Money Market accounts and government bonds carry lower risk and almost nil volatility. The disadvantage is lower returns compared to the overall market. Opting for index funds and exchange traded funds (ETFs) can be misleading. They’re an inexpensive way to get you into the market, lowering transaction costs but not from risk. They aren’t the most active ways of trading, so you can expect fewer lower fees. You will have the ups and down even when investing this way – no investor is ever free from at least a small amount of stress. There will be ups and downs just as in any investment opportunity; the important thing is to determine your investment horizon and ultimate goal. Remember, the maniac Mr. Market should not dominate your investment strategy.