Carl Richards/ Behavior Gap
RP: Many people, including financial professionals, use the terms risk and volatility as if they
were interchangeable. In fact, they’re two very different things.
Here’s the financial writer and podcaster Carl Richards.
CR: Often, we use words like risk and volatility and we assume, the industry, even really good
financial advisers and financial planners will use words like risk and volatility and assume that
everybody knows what it means.
I know I wouldn’t if I was not in this industry, there is no way. If I took a statistics class in
college, I wanted to forget it as soon as possible. Most of us don’t know what that means.
RP: Risk specifically refers to a permanent loss of capital.
Market volatility, on the other hand, is by it’s nature short term, and a relatively common
As long as you stay disciplined during periods of volatility, they shouldn’t pose a long-term risk
CR: You view volatility as really scary and risky in the short term but not risky in the long-term.
And so, volatility really, underneath, is just a measurement of standard deviation. And,
underneath, what that means is: ‘How much does something wiggle?’ That’s all it means.
Stocks wiggle more than bonds, bonds wiggle more than cash.
You’ve just got to decide if you can handle that. Now, there’s a whole bunch of tricks and
techniques you can do to ignore it. Right, if you’re not paying attention to it, you don’t have to
deal with it. So, that may be a hint.
RP: The distinction between risk and volatility is a very important concept for investors to
understand. If you’re in any doubt about it, you should see a financial adviser.
CR: As a client of an adviser, the one thing I think you should feel absolutely sure that you can
do, is say: ‘Oh, hold on, could you back-up and explain that?’ Just ask clarifying questions. Any
good adviser will appreciate it, and if they don’t appreciate it – find a different one.
RP: So, don’t confuse risk with volatility. And never be afraid of asking your adviser to clarify
anything you don’t understand.