Don't confuse Volatility with Risk. A Risk Management Lesson

 The securities markets offer endless possibilities to create wealth. I use securities instead of stock because there are many tradable securities in the market, not just stocks, although stocks is what people are familiar with.

There's a confusion between risk and volatility, and if your're confused, you're not the only one. I first came to a clear definition of risk and volatility in Michael Covel's book Trend Following

Risk = possibility of a loss

Volatility = Rate of change, in markets' context, price

All investments carry risk; that is, there's a possibility that you may lose your invested capital. Therefore, it is important to understand this before you venture into investing. Various asset classes have varying volatility; cryptocurrency is currently the most volatile assets classes whereas bonds have the least volatility. High volatility doesn't necessarily imply high risk; if the average volatility of a Rand is 20 cents, although it's 20% of the asset value, it remains the "normal" volatility of that asset.

There's a notion that high risk high returns, that's incorrect and this notion need to clarified. Although stocks were once considered to be more risky and offered higher returns; there were periods where stocks barely returned more than the inflation. Which prompts one to ask, was the risk worth it? It is important that the investor determine their risk appetite, project their expected returns, based on their past performance, and not just expect "high returns" on the basis that they've invested in a "riskier" asset. Check our YouTube Trend Trader where we further discuss this.

Let's preach financial literacy but do so by sharing the correct information.