We are told by the financial world to treat volatility like a rock star. We have all heard the platitudes about high risk, high reward—embrace the risk. Each of these euphemisms tricks countless Americans into believing that profitable investing means putting up with gut-busting market rollercoasters. After years spent analyzing market trends and observing investor behavior, I've come to a firm conclusion: chasing volatility is a dangerous game, and a focus on stability and lower-risk investments is the more prudent path to long-term financial security.
With the glimmer of potentially huge profits comes an irresistible temptation. Whether it’s a lottery win or tales of overnight millionaires made by volatile stocks or cryptocurrencies, those stories are alluring. These, mostly, are the exceptions, not the rule. For each one of these investors who hits the jackpot, thousands more are left nursing hollowed-out 401Ks and a mouth full of ‘what if’ sourness. Cause for concern The fact is that big volatility raises the risk of major losses exponentially.
Market risk, unsystematic risk, country risk, and operational risk are all exacerbated in high-risk volatile environments. Market risk is the risk of the entire market going down. This downturn doesn’t have to take all your investments down with it. Unsystematic risk, on the other hand, deals with risks connected to a certain company or industry. Given high levels of volatility, the effect of any bad piece of news or event can be magnified and hurt individual stocks even further.
Country risk and operational risk have never been more relevant in our increasingly globalized markets. Sudden shifts in currency valuations or upheaval in political regimes abroad can wipe out investments in international markets. Whether due to internal processing failures or fraudulent activity, the impact on a company can be substantial. This effect is amplified during periods of heightened market uncertainty.
If we disregard all other costs of seeking volatility, none is more tragic than the risk of principal loss. When markets crash and anxiety emerges, investors tend to overreact. This forces them to sell their holdings, often at the worst possible time, thus locking in their losses. The impact of recovering from a blow this size can take years if not decades, deeply affecting long-term financial aspirations.
The other side will strongly advocate the idea that HV is a great predictor for anticipated future movements in the market. Yet, contrary to common belief, my analysis time and time again proves that HV is a poor predictor of future performance. You shouldn’t assume that just because a stock has had a lot of volatility in the past, it will continue to be that volatile. It doesn’t tell us anything about where its price is likely to go in the long-term.
The statistical assumptions underlying HV predict that price movements will exceed expected ranges by 68%, 95%, and 99.7% of the time. These forecasts rarely play out in the actual marketplace. Banking on such assumptions can set up agencies for a false sense of security and misallocated investments.
Beta, a measure of a stock’s volatility compared to the market as a whole, is another commonly misinterpreted metric. A stock with a beta of 1.1 would on average move 110% of the beta coefficient for every 100% movement on the benchmark index. This increase is contingent on price movements and does not ensure one will earn higher returns. A high beta indicates the stock is highly sensitive to market moves. This is the case regardless of which direction the market trades.
Next, what’s the opposite of pursuing volatility The secret is in the playbook where a strategy maps out stability, diversification and a long-term view.
Diversification is key though. Spreading investments across different asset classes, such as stocks, bonds, mutual funds, ETFs, and even alternative assets, can significantly reduce risk. When one asset class does poorly, other asset classes can protect you, softening the blow to your portfolio.
Dollar-cost averaging (DCA) is another one of your best weapons against volatility. Investors can offset the effect of temporary price fluctuations by making regular investments of a fixed dollar amount at evenly spaced intervals. Whatever the market environment, this strategy is a winning formula for success. When share prices are low, you acquire more shares; when they’re high, you buy fewer shares. In the long term, this approach can result in a cheaper average price per share and stronger returns overall.
Having a long-term outlook is extremely important. Investing is not a short-term get rich quick endeavor—it’s a long game. By focusing on long-term goals, such as retirement or financial independence, investors can ride out market fluctuations and give their investments time to grow. A time horizon of at least five years is widely considered a best practice.
Keeping a robust emergency fund is equally important. Have enough cash for three to six months’ worth of living expenses. By doing this, you’ll avoid having to sell investments in a down market to pay for unplanned expenses.
Frequent rebalancing of a portfolio is another critical aspect of a strategy focused on stability. Periodically reviewing and adjusting the portfolio to maintain the target asset allocation can help minimize risk and ensure that investments remain aligned with long-term goals.
For investors looking for even more security, there are a few low-risk investment options. Treasury inflation-protected securities (TIPS) offer protection against inflation, while high-yield savings accounts and certificates of deposit (CDs) provide a safe haven for capital with modest returns. Treasury bills and notes offer a fail-safe backup. They are different in that they are supported by the full faith and credit of the U.S government.
OverTraders.com is committed to improving investor education. We arm them with the tools and knowledge to make them confident in tackling the unique complexities of the financial markets. And we know that an unwavering commitment to stability and risk management is our best path to long-term financial success.
While the allure of quick profits may be tempting, the evidence is clear: volatility is a dangerous game. Adopt a risk averse posture toward your investments. By focusing on diversification and thinking long term, you can create a more stable and lucrative financial future. The goal isn't to get rich quick, but to build wealth steadily and sustainably, ensuring financial security for themselves and their families.
