The theme this week on the Retirement Quick Tips Podcast is: How To Use Stock Market Volatility In 2022 To Your Advantage

Today, I’m talking about the difference between volatility and risk. It’s critical that you understand the difference between the 2 in order for you to be a successful investor in uncertain times like we’re facing today, and the big stock market swings that accompany it.

Volatility is the degree by which the price or value of an investment fluctuates. In volatile periods like we’re in right now, prices swing sharply up and down while in less volatile periods, price swings are muted. 2021 was a very calm time in the stock market. Most days the stock market just kept marching higher, with hardly a hiccup along the way. 

Risk, on the other hand, is the chance of investments declining in value or the likelihood for permanent loss.

For example, most broadly invested mutual funds or an index funds are actually fairly low risk investments, even if they’re 100% in the stock market. Why? Because the risk of permanent loss is low. 

Most broadly invested mutual funds or index funds have hundreds of stocks across many different industries, with most having no more than a 2-3% in even the largest holdings in the fund. With your money spread out across so many different stocks, the likelihood for permanent loss is low, given enough time.

Is it possible that you could lose money on an investment like this? Absolutely, since you can sell it at any time and lock in those losses. That’s risk. But the chance that that investment goes to zero and you lose all of your investment is extremely low. 

When you own a single stock on the other hand, that’s risk. There’s a good chance that the stock could go to zero if the company goes bankrupt, and it can happen overnight. 

When you can separate risk from volatility and understand that risk is permanent loss, volatility is temporary loss, you’ll better understand how to take advantage of volatile times and not make the mistake of turning temporary volatility into permanent loss, by selling when your portfolio declines in value. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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