Volatility is Not Risk
Note: I wrote this after seeing a headline on Tuesday morning (the 25th) that said “’Peak uncertainty’ on tariffs still looms over stock market despite Monday bounce.”
There are many things in the finance profession that I can’t stand*, but nothing bothers me more than our misuse of the word “volatility.”
I recently attended an investment presentation titled, “Volatility is the biggest risk facing investors today.” I walked out after five minutes.
Let’s get something out of the way right now, and I know I never shut up about this, but volatility is not the same thing as risk. They are not interchangeable, and pretending they are is one of the most damaging habits in finance.
(*Other contenders include doomsayers, return-chasers, outlandish headlines, annual outlooks, egos, those without a lick of self-awareness—I'm talking to you, person with total conviction about where the market is headed—complicated strategies that aren’t as good as straightforward ones, podcasts that wax poetic about what might happen, the misuse of ellipses, the list goes on and on and on.)
Let’s define risk. Most people hear “volatility” and think danger. But real risk is something very different. Unfortunately, risk has many definitions.
Risk is running out of money, risk is failing to meet your goals., and risk is reacting emotionally and making a decision you later regret.
Volatility means prices move up and down. It’s not dangerous. It’s normal. It’s the price you pay for growth.
Clients should think about volatility this way: volatility is the price of admission for long-term returns. You shouldn’t like it, but you do have to respect it. More importantly, you have to know it’s coming because it always is.
If you’ve got a solid plan, enough cash for the near term, and investments that match your goals and timeline, volatility is something you can ignore.
Now, the investment industry loves pitching strategies/products that promise lower volatility and higher returns. “This investment provides greater returns with less volatility,” they say. It doesn’t work that way.
Lower volatility means accepting lower long-term returns. Pursuing higher returns almost always involves tolerating more volatility. You can't have one without the other. Anyone claiming otherwise is selling you something you don't need.
Successful investing isn't about avoiding volatility. It's about building a clear, straightforward plan and sticking to it, no matter how volatile markets get.
Volatility is not the same thing as risk. Do not confuse the two because if you do, it makes it so much harder to be a successful investor.
