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“Volatility” is a “Financial jargon”. It refers to the upward and downward trend swings in market indices/interest rates, on which an investor will have little or no control at all. Whereas Risk, on the other hand, is a personal matter like possibility or chance of an injury, loss or hazard, or how much financial uncertainty an investor can tolerate.
A volatility in stock market can be measured in multiple ways. The simplest perhaps is the difference between the maximum return and the minimum return. But the more accurate method preferred by analysts is to measure using “Standard Deviation”.
Standard deviation indicates how much a stock market index varies from its average, both on the upside and the downside.
But in case of risk there is no such measure to calculate. In financial terminology risk refers to the potential permanent loss of money. Technically risk tolerance means different things to different people. “You don’t really know your tolerance for risk unless and until you have knowingly been through it.
When it comes to market, age plays a vital role in connecting risk and volatility. In theory, the younger you are, the less risk affected you will be with volatility. You can set your sights on long-term goals, more or less ignore the market’s fluctuations and trust that investment will yield good return as you have time on your side. As wisely said market and climate both are alike; when it will turn in your favor no one knows, conversely, the closer you are to the age of retirement, the more vulnerable you are to volatility.
Are financial markets the only sector where you face risk and volatility? Do think again.
Going by that principle, aren’t PPF and other interest-bearing investments also volatile ? Isn’t their return change, due to interest rate fluctuations? Don’t banks revise their rate of return on Fixed deposits every quarter to adjust the volatility? At the same time, equity prices are known for its fluctuations. But just because prices fluctuate does not mean there is a risk of loss.
So, how you cope with the impact of volatility on your risk tolerance? First of all be honest to yourself in terms of investment and stop acting on impulse. If you can’t digest the volatility then don’t invest in volatile avenues. If you think you need support please contact your financial advisor who is far more equipped with knowledge and tools to guide you to take an informed decision rather than you ending up taking a rash move.