22 July 2011

Volatility

As I've said before, my advice to clients who don't like seeing their investments going up and down in value is "don't look!". But the fact remains that volatility in investment values has been very much present over the last six months or so, even though cumulatively there has been little movement up or down.

Fidelity (fund managers) produce some useful information on investment markets, and they have just released a "volatility tool" which is very helpful in understanding the impact of what is happening. In investment terms, when we talk about "risk" we generally mean "volatility". But by holding an investment for a longer time, the volatility evens out and, in effect, the investment becomes less risky.

Here's some key numbers which are rather interesting. Limiting ourselves to UK equities, the highest growth in one year over the last twenty was over 50%. And the biggest loss in one year was 34%. That's pretty volatile (= risky)!

But if you extend the window to five years, the highest rate of return is down to 20% per annum, and the biggest loss is also down - at less than 7%. Much less risky.

So my advice not to look at your investments is not so silly after all. The fact is, values go up and down, but provided you are invested in the right place (now there's a big proviso), volatility will even out and give you the right results in time.

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