You’ve probably heard the term “market volatility” in recent days, most likely in the same breath as “coronavirus.” The pandemic caused a plunge in global markets as consumer spending dropped and manufacturing decreased following the virus’s spread.
But what exactly does volatility mean? It refers to an investment’s price stability, risk, and likelihood for high returns. The more volatile an investment is, the riskier a bet you’re making — and when risky bets pay off, you’re likely to get a higher payout. A more stable investment, such as a bond, is less heartburn-inducing, but you’re probably not going to get as large a long-term return as you will with more volatile stocks.
Of course, the equation isn’t as simple as “big risk=big return” or “conservative investment=lower but guaranteed return.” Take cryptocurrencies, for instance. They are extremely volatile, and some early adopters made millions off them. But ongoing regulatory uncertainty and the lack of widespread adoption has kept the risks high, and people have also lost millions on crypto as well.
Seemingly low-risk investments aren’t always a sure thing, either. Bernie Madoff pulled off massive fraud in part by showing consistent returns year after year. Stocks that look *too* stable to be true probably are.
To simultaneously take advantage of and protect yourself from volatility, you can diversify your investments with a mix of stocks, bonds, and other opportunities that balance out one another’s risk factors.