What It Is and How Important It Is For Our Investments
As all our readers know, in our in-depth studies on economics and finance we try to explain the basic concepts that can be useful to be able to better allocate any savings that we want to invest. There are many terms that appear rather difficult to those who do not chew economics and finance, among them there is undoubtedly the term ” volatility “.
Volatility is one of the key concepts of finance but its incidence is not always clear for savers.
To begin with we try to give a definition of the term volatility : it measures the intensity of the variations undergone by any financial investment instrument in a given period of time.
In short, volatility indicates the change in percentage of a security or a portfolio of securities, in practice a measure of the fluctuation of its value.
From a mathematical point of view, volatility is measured in percentage terms and indicates the usual distance of the price of a security from its average value.
Let us now try to give an example that can explain what volatility is :
If, for example, we consider that a given stock had a volatility of 20% over the last 12 months, this means that the average distance of its value from the price average of the stock was around 20 percentage points. In other words, higher volatility is matched by sharper price changes, while lower volatility variations are matched by softer variations.
After these initial evaluations it can be thought that the volatility of a security goes to indicate the level of risk associated with it. This association of ideas is true but only in part.
Certainly if you buy an asset with high volatility you are more exposed to fluctuations in its value. Obviously this means that if you want to keep the title for longer, you need to be ready to endure these fluctuations. Not everyone, however, is ready to see their financial portfolio to have strong upward or downward fluctuations and therefore before investing money one must understand their risk appetite. If you have a low risk appetite you should invest in less volatile stocks or equity indices , even at the cost of sacrificing part of the returns.
Not necessarily, however, a low volatility corresponds to gains. You can have indexes with a greater deviation, but at the end of a medium-long period they can lead to profits, while indexes with a more constant trend and subject to lower fluctuations that can lead to losses in the medium and long term.
Therefore, before proceeding to any financial transaction, it is necessary to have in mind what kind of objectives you want to achieve with your investment. By observing an investment that has a medium-long time horizon, with an average risk aversion, it will be possible to concentrate on the medium-long term trend without giving too much importance to the daily fluctuations of the securities.
There are also investments in the very short term, through techniques and speculative strategies such as market timing, which exploit the daily fluctuations of the securities with continuous operations of purchase and sale of the securities held. For savers less inclined to the risk inherent in the stock market, it is worthwhile to invest in medium and long-term macroeconomic trends by focusing on a strategic portfolio with securities with lower volatility .
Another way to minimize the incidence of volatility is to build a well-diversified portfolio, in which the positive performance of some assets is offset against the negative one of others, so the invested capital will grow more balanced.
To summarize our in-depth analysis of the volatility of financial products we can say that volatility itself is neither a positive nor a negative thing. You simply need to take this type of variable into account in your investments and you need to understand how to invest your savings. We remind you that when making an investment you must take into account all the variables that affect the amount of money invested in the market in order to protect your savings in the best possible way.