The stock market will experience both ups and downs in any given year. These fluctuations are typically categorized as volatility. Volatility is often measured by calculating the standard deviation of a security’s returns over a period of time.
While volatility is an essential factor to consider when making investment decisions, it is not the only one. Another critical consideration is the risk. Risk can be defined as the potential for loss on an investment.
Let us explore the difference between volatility and risk and discuss how investors can best manage each to achieve their financial goals.
William Schantz Explains Volatility vs. Risk
At first glance, it may seem that volatility and risk are the same. However, according to William Schantz, they are two very different concepts. Volatility measures how much the price fluctuation of a security. On the other hand, risk is the potential for loss on an investment.
Let us consider an example to better understand the difference between these two terms. Imagine purchasing stock shares in Company XYZ for $100 per share. After holding the stock for one year, the price has increased to $110 per share. In this scenario, your investment has generated a 10% return.
Now imagine that instead of increasing in value, the price of Company XYZ stock falls to $90 per share after one year. In this case, your investment has experienced a 10% loss.
While both of these scenarios involve a 10% change in the stock price, they have very different implications. In the first scenario, you made money on your investment; in the second scenario, you lost money.
According to William Schantz, the key difference is that volatility measures fluctuations in price, while risk measures the potential for loss. Therefore, even if an investment is volatile, it may not be risky. Likewise, an investment can be relatively stable in price but still pose a significant risk of loss.
Investors need to understand both volatility and risk when making investment decisions. While volatility can certainly impact the value of your investment, it is not the only factor to consider. Risk is also a critical consideration, and it is crucial to understand how the two concepts differ.
How to Manage Volatility and Risk As Per William Schantz
Now that we have explored the difference between volatility and risk, let us discuss how investors can best manage each to achieve their financial goals.
When it comes to volatility, there are a few things investors can do to minimize its impact. First, you can diversify your portfolio across different asset classes. This will help to mitigate the effects of volatility, as different asset classes tend to move differently in relation to one another.
For example, if the stock market is experiencing a sell-off, bonds may hold their value or even increase in price. This is because when investors are worried about stocks, they often seek the stability of bonds. By diversifying your portfolio, you can help to protect yourself from the volatility of the stock market.
Another way to manage volatility is to invest in index funds. Index funds are a type of investment that tracks a specific benchmark, such as the S&P 500. Because these funds seek to mirror the performance of a particular index, they tend to be much more stable than individual stocks.
Investing in index funds can help reduce your portfolio’s overall volatility. This is because you will invest in many different stocks rather than putting all your eggs in one basket.
When it comes to risk, William Schantz believes that investors should always be aware of the potential for loss on their investment. He recommends diversifying your portfolio across different asset classes and investing in index funds as two of the best ways to manage risk.
Diversification helps mitigate the effects of volatility while investing in index funds can help reduce your portfolio’s overall risk. By relying on these tips, you can help to protect yourself from market fluctuations and achieve your financial goals.
William Schantz’s Final Thoughts
Every investor needs to understand the concepts of volatility and risk. While both factors can impact your investment, William Schantz believes it is more important to focus on risk when making investment decisions.
Diversification and investing in index funds are the best ways to manage risk. They help you protect yourself against the ups and downs of the market and achieve your financial goals.