Successful investing is all about balancing risk with return. The return part seems easy enough… we all want to see the value of our investments go up. However, investment risk is a bit more complicated than you might think. Let’s take a look at what investors mean by risk, and how you should consider it when investing your money.
According to the dictionary, risk is “exposure to the chance of injury or loss,” and investors would agree. When we invest our money in stocks, real estate, or other assets, we don’t want to lose it. So the first and most obvious investment risk is the possibility that we could lose all our money.
The good news is that if you follow the basic rules of investing that you’ll learn in this video series, the probability of losing all of your money is virtually zero. The bad news is that you’ll still get nervous when you see the value of your investments move up and down each day.
This fluctuation in prices is called “volatility.” As the price movements get more extreme, the volatility of your investment is said to increase. When the up and down movements get less extreme, volatility is said to decrease.
While investment volatility can be scary, it can also lead to significant investment opportunities.
Here’s how that works…
When prices start to fall and volatility is increasing in the downward direction, some investors panic. It feels to them like their money is running down the drain, and that if they don’t sell now, they’ll end up losing everything. This is the ideal moment to grab investments at prices lower than they’re actually worth. In short, volatility gives you the chance to buy investments on sale from terrified investors who are fleeing the market.
This is why it’s so important to keep your emotions in check when you make investment decisions. Panic can be very costly.
So now you know the wise investor’s secret: Volatility equals opportunity, as long as you follow the rules for building strong portfolios.