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Volatility, share market

You want volatility!

The exclamation mark on the title of this blog is to show just how important volatility really is when it comes to investing. Owning shares in companies, whether Australian or global, comes with volatility, and high returns only exist with high volatility. If you are investing in low volatility assets, then you can only expect low returns.

Even still, many people are willing to accept low returns because it feels safer; in fact, it feels like there is virtually no risk at all. This is certainly the case with term deposits, where you might be getting a 0.5% return (at the time of writing). Sure, it’s highly unlikely that you will experience any risk, but you’ll never get great returns, either.

On the other hand, the share market has about an 8% rate of return. This return is not guaranteed – but it is the average, historically speaking. Volatility is the risk we take in order to get such returns.

If you ever see a company advertising ‘high returns with no volatility, guaranteed!’ then run. This is impossible – if this were the case, why would anybody invest in anything else? These companies are advertising what are called ‘junk bonds’. They appear like a safe option, but they are far from that. Investing in junk bonds is actually a huge risk. If the company goes under, which they often do, you’ve lost everything you’ve invested. And that is a significant loss.