Risk and volatility – What’s the difference?

When it comes to investing, specifically in the stock market, there is a constant discussion around risk. What are the risks of the market? What are my risks if I invest in the market? Questions that are trying to assess the ultimate question of “Will I lose all my money if I invest in the stock market?”

Risk is usually a measure of danger, harm or loss. Risk comes in many forms and what is deemed risky to one may not be deemed risky to another. The fear of loss, specifically around money, is a strong emotional response. There are many investment strategies and tools that are available to minimize the risk of loss. The most prevalent strategy is diversification. As the saying goes, “Don’t put all your eggs in one basket.” If you have all your money in one company, the risk of loss is higher than if it’s spread among many companies.

Volatility is also part of investing in the stock market. Volatility is when something changes rapidly and unpredictably. The markets at times can be volatile. We have seen this over many years of history. Events like the great depression, the great recession and COVID, have led to markets being extremely volatile for short or long periods of time.

Volatility is not the same as risk. Just because something is volatile does not mean you will necessarily lose everything. If you believe a company is a good investment and you don’t need to sell it right away, you can ride out volatility and recoup “paper” losses. If a company goes bankrupt then the loss is real. But ups and downs of a stock price do not necessarily lead to a loss.

A. Craig Elder, CFP, FMA, CIM, FCSI, is a Vice-President, Portfolio Manager and Wealth Advisor with RBC Dominion Securities Inc. in Medicine Hat. RBC Dominion Securities is a member of the Canadian Investor Protection Fund. Source material provided by RBC Wealth Management. For more information on this and other financial strategies, contact Craig at www.acelder.ca or 403-5042723.