When we think of investing, one word that immediately jumps to mind is risk and it’s something that greatly shapes how we go about growing our money.

However, one of the most common mistakes people make about their investments is confusing volatility with risk.

So, what is volatility? And why is it so important to understand the differences between them?

Volatility

The term volatility is used to describe the degree by which a share price’s value fluctuates.

When experiencing volatility, share prices tend to plummet and rise sharply, and when they’re not, they tend to be much more steady and predictable.

However, risk is simply a term used to highlight the chance of investments declining in value. It can be influenced by many factors and will vary per person.

Mistaking volatility as risk can happen very easily, especially if you monitor daily changes to your investments. But, it’s important to remember that the two are different to prevent premature or unnecessary financial losses.

Investing Long Term

In general, investing requires patience and you are encouraged to use a future-thinking mindset.

Investing in the stock market is no different.

Not only does history suggest that over a long period of time, equities typically outperform cash, but thinking and acting with a long-term mindset allows your money to recover from any falls in value.

Volatility Benefits

It’s easy to think of volatility as something negative. However, these dramatic fluctuations work both ways, and experiencing both the good and the bad, can offer more favourable outcomes than if you were to pull out prematurely.

Volatility can be stressful, however, staying strong throughout uneasy times may help your long-term returns outweigh those of your short-term losses.

Final Thoughts

Risk and volatility are different, and understanding their dissimilarities can help you avoid short-term and unnecessary financial losses.

It is very easy to see a fluctuating share price or sudden drops in value and act quickly or impulsively, however, allowing your money the chance to recover is often the best move. Having a long-term focus on your investments can also reduce your chances of making costly mistakes!

It’s also important to remember that seeking financial investment advice can disperse the clouds of doubt and make it easy to make objective and rational decisions about your money.

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Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.

Disclaimer – The value of investments can both rise and fall, and you may not get back what you initially invested. The information posted in this article is correct to the best of our knowledge, however, it is not a recommendation to pursue certain strategies. Please consult a qualified and experienced financial adviser who will consider your personal circumstances and suggest relevant solutions.