John Labunski- How to deal with volatility in investments

by John Labunski The Broke Leading the Broke

Volatility is related to the variation beyond normal – up or down – of asset prices in a short period of time.

 

Political, economic, interest rates, stock exchanges and exchange rates have a lot of variation and, as a consequence, most investments also become volatile because of these influences.

 

Understand in this article what it is and how to deal with volatility in investments.

 

What is volatility?

 

Volatility is a measure of risk that shows how much an asset, security or market index can change over a given period of time.

 

The more the value varies in this given time, the greater the risk of making a profit or loss in trading this asset.

 

 

Risk and volatility, what is the relationship?

 

The risk is the probability that the investor will suffer some loss with the chosen operation or asset.

 

Volatility and risk are often associated and both must be considered when making investment decisions.

 

This is because volatility is used to measure risks, considering that it shows the intensity and frequency of variation in asset prices.

 

When we talk about investments, no matter how safe it may seem, there will always be some risk involved.

 

Impacts of volatility on investments

 

Volatility is an important factor to consider when buying or selling assets and achieving good results.

 

This is because by studying volatility, it is possible to understand the variation in asset prices and know when to enter or exit to profit from operations.

 

By choosing an asset with a lot of volatility, you are taking more risk, which can provide you with a greater gain in the long run. When you choose an asset with less volatility, you are choosing to take less risk and consequently, you can have lower returns.

 

Volatility and long term

 

As we talked about above, generally in higher risk investments, there will be more volatility.

 

This means that in the long run you will probably make more money with this type of asset, but along the way you will certainly have periods (days or even years) running in the negative, depending on the volatility of the chosen assets.

 

Factors that influence volatility

 

Some financial market factors directly influence the volatility of investments. 

 

This is the case of political divergences, of economic factors – such as crises – of high or low interest rates – which can influence even low-risk investments – of stock market fluctuations due to problems with listed companies or the market in general and the rise and fall of exchange rates.

 

All of these have a direct impact on investments and are usually factors that are beyond investors' control.

 

Importance of diversification

 

When building an investment portfolio, always opt for portfolio diversification , choosing good assets from different market niches. In addition, also have an active management, closely monitor investments and adapt the portfolio to your risk profile , current moment and future goals.

 

It is important to emphasize that it is also necessary to pay attention to the correlation of assets in the construction of investment strategies, to help reduce the risk of the portfolio.

 

Therefore, always look for uncorrelated assets because the lower the correlation between them, the lower the volatility of these combined investments and the greater the compound return of your portfolio.

 

How to deal with volatility?

 

Dealing with volatility is closely linked to your investor profile, your risk tolerance and also your emotional control over the subject.

 

Let's use bitcoin as an example , which is a highly volatile asset with large price swings.

 

Suppose you started investing in bitcoin and within the first few days you lost money with the asset. However, if you look at the long term, you will notice that the asset has had an average appreciation of 200% per year in the last 13 years.

 

That is, if you buy bitcoin, you need to be prepared for instability and to make or lose money easily and quickly.

 

As important as looking for better asset returns is knowing how you will react to their volatility.

 

So, if your profile is bold and your vision is long-term, you will probably be able to handle market fluctuations better.

 

Now, if your profile is conservative and you go into despair with each swing in the asset, it is better to opt for less risky investments with more predictable returns, but which will make you more confident and secure in your choices. 

 

Conclusion

 

For better gains, investors need to take on more risk and consequently deal with more volatility.

 

Volatility is related to the change beyond the normal range of asset prices in a short period of time.

 

It is an important factor to consider when buying or selling assets and being able to profit from operations.

 

You don't have to be afraid, but rather learn how to deal with volatility to get the best results.

 

 

Posted by: John Labunski

Sponsor Ads

• Ad Space Available - Rent it Now!

Created on May 9th 2022 05:46. Viewed 210 times.

Comments