How many amateur investors tend to think volatility is risk? Maybe not most, but many do. Why? Because people have told them that is how you measure risk.
A more enlightened view is that volatility has little to do with risk. Volatility is volatility, the noise around the signal. Noise eventually cancels and the signal remains.
If you think of your investments as money rather than investments, you can become confused. An investment made in a liquid market, can become money if you sell it. Until you do, it’s not money and that leads to the misunderstanding. Something unpredictable is not necessarily risky, it is merely unpredictable.
The idea of volatility as risk has an implicit assumption that no one mentions. That other thought is you risk loss under one condition, “If you sell at this price, then ….” If you do not intend to sell and may be a buyer at that price, is there any risk? Then what? No real concern. The noise eventually cancels.
The risk is in how you defend yourself, or don’t, from the need to sell. The marekt is the background. If you can meet needs for cash from other sources, there is no volatility market risk.
But don’t be too confident. There is still an insidious risk that awaits.
Volatility is not relevant for investors with long time horizons. There are many “day-trading” ideas that are not. The rules are different in that space. A simplifying question.
Cui Bono? To whom the good? Ask the question periodically. Who will be the winner if you invest?
How predictable is that win? Volatility is not quite random, but it is close. Day to day prices are unpredictable.
Simple wisdom, You will be wise to avoid investment advice based on volatility.
Sometimes you might have made money, other times not. Failure to keep score is a huge mistake. Yu learn little without a record of the activity. Avoiding volatility trading might not make the most money in a particular short term, but in the long term, it is a way to be less wrong. For many investment approaches that is an advantage.
Volatility based investing seldom has a connection to business values.
Know yourself. Know your task. Know your limits. Know that you don’t need everything now
New investors can do better if they pay attention to fundamental business values rather than market statistics and macro-forecasting. avoid being caught up in the sophistication of theories that need little Greek symbols lying on their side.
Reread number 1 and number 4 above.
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