Is a Volatile Investment a Risky Investment?

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?

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.

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.

Over the long term of an investment,
the only reason to fear volatility is if it
threatens to result in permanent loss.

We have written about long term
investing and how five to ten years is an
appropriate time to put money into a
promising investment.

One of the reasons for this time frame
is that investments can be volatile and
market timing is always less than
perfect.

Investors who choose the most risk-
free investments always give away the
potential for greater profits.

When we wrote about how to invest
without losing any money, we wrote
about these investment vehicles, in order
of lesser to greater risk:

Bank deposits with Federal Deposit
Insurance
US Treasury Bills, Notes, and Bonds

 Investment Grade AAA and AA Bonds
 Long term value investing based on
intrinsic value assessment

Within any investment portfolio there
should always be a place for these
investments.

Then, when a person needs money, they
will not need to sell a stock, for example,
when the market has just crashed.

By in large, the closer one gets to
retirement, the more conservative
should be one’s portfolio.

Nevertheless, there will always be a place
for long term investment in stocks and
others investment vehicles of which short
term volatility is normal.

When Are You Willing to
Accept the Risk?

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.

The problem is that many times there are
extremely valid reasons why an
investment has lost value.

CNBC writes about bond investors
buying risky high yield junk bonds.

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.

This is a matter of market timing and
is a valid reason to equate volatility
with risk.

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.

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.

Is a Volatile Investment a Risky Investment?

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Is a Volatile Investment a Risky Investment?