Volatility risks

The risk that most investors are asked to assess, is their attitude towards a risk called volatility.  Volatility is simply a measure of the up and down movement of an investment. 

A more technical definition would state that volatility is a measure of the deviation of the monthly movement of an investment from its average monthly movement.

Investors quite rightly need to be aware of the up and down movements of investments since volatility is a good guide as to how risky an investment or a portfolio of investments will be in terms of price movement.

However, volatility is only an average risk and it is not the actual risk the investor is exposed to at any one point in time.  During periods when markets are highly valued, this simple measure of risk significantly understates the risks to which investors are exposed.

It is also not a very good indication of the return that an investor should expect form their investments since the price of an investment at a point in time determines its return more than its historical risk.

Importantly, well structured portfolios will be capable of protecting an investor against the effects of volatility.  If you are exposed to the monthly up and down price movements of your portfolio your portfolio may not be the right one for you.

Additionally, volatility is more of a measure of risk associated with different types of investment styles and your advisor should be educating you about the risks and return benefits of their investment style when considering the up and down price movements of investments.

Finally, a portfolio that is constructed to meet financial needs should be taking into consideration risks such as volatility in the investments that are included.  You the investor should not be forced to choose, on your own, which risk is most appropriate to you.