Points to Remember

Elyse's Positive Risk

Elyse Jagessar

Age: 33
Occupation: Architect

“I love volatility. It’s what allows me to buy cheap.

Before you think I have my advisor trading daily and making feverish calls to Wall Street partners, let me explain further…I think when we hear words like ‘volatility’ and ‘risk’, we focus only on their negative connotations and this provides us with every reason to say ‘no’, ‘not yet’ or ‘not so much’ to investing.

If we were to focus on their positive aspects, the act of placing investing as another spoke in the wheel of our financial plans, alongside things like savings, insurance & mortgages, would come more naturally.

The positive to volatility? What goes down, most times comes back up again. And unlike that rollercoaster you often hear about, the starting and ending positions differ. With the compounding of returns, the end position can leave you on higher ground from when you began.
The positive to risk? You know this. It’s reward.”

FIRSTLINE POINTS TO REMEMBER

THE BRIGHT SIDE TO VOLATILITY

Volatility is the daily up and down see-sawing of investment values. Note the word ‘up’ because it’s easy to focus on the word ‘down’ and it’s this negative focus that gives ‘volatility’ a bad name. However, if there was no volatility, stocks would turn into fixed, static instruments (and that’s what we have bonds for).

Using the S&P 500 Index as a barometer, we’ll show you how one set of data presenting the Index’s annual returns over the last 10 years can be shown in two different lights:

THE NEGATIVE SIDE TO VOLATILITY – Year-to-year roller-coaster ride
Annual Returns of S&P 500 Index 1997 – 2007


THE POSITIVE SIDE TO VOLATILITY – Cumulative long-term increases
Hypothetical starting investment of $10,000 based on the above annual returns

NO RISK, NO REWARD?

The perfect investment strategy would feature the lowest possible risk for the highest possible returns. A government bond with a 40% yield (for a dream example) would form primary part of such an investment strategy.

In the absence of dream products and perfect strategies, we are left to carefully balance our appetite for risk with our desire for returns.

Note these associations:

  • Low levels of uncertainty (low risk) = Low potential returns (e.g. government bond at 6% yield)
  • High levels of uncertainty (high risk) = High potential returns (e.g. telecommunications stock in a BRIC country: possible Year A return of -6%; possible Year B return of 36%)