Risk vs. Volatility – Know the Difference
By: Curt Stowers
Last week ended and this week started with some pretty significant downward movements in global stock markets. Right on queue, the “negative Nellies” came out of the woodwork with proclamations about how the end was near. Will people never learn?
Earlier this week I came across a perspective on risk versus volatility that I thought was absolutely brilliant:
- Risk is related to the permanent loss of capital.
- Volatility is related to transient fluctuation in value of capital.
Permanent versus transient. This perspective is—in my opinion— absolutely 100% spot on. My investment thesis is built around two unshakable beliefs:
- Twenty years from now the world’s population will be larger than it is now.
- Twenty years from now the world’s economy will be larger than it is now.
If you buy into the above two beliefs, then the market fluctuations we just experienced are nothing more than a demonstration of volatility. Conversely, if you do NOT subscribe to the above, you may believe that your capital is at risk.
Am I right that this is an issue of volatility, or is it “different this time” and we are facing a permanent loss of capital? There is absolutely, positively no way of knowing. HOWEVER, every instance in the past has come down on the side of volatility versus risk. And that is the position that I have always taken and always expect to take.
Thanks for sharing a bit of your time with me today.
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