What's the Difference Between Risk and Volatility?

You may think of volatility and risk as interchangeable terms, but they’re not. Picture volatility as a two-way thoroughfare. Just as a car on that road can go in either direction, the price of an investment can go up or down over time. That’s volatility.

Risk is a one-way street. It’s the possibility that an investment will decrease in value and its price will drop. So, while volatility encompasses both the upside and downside of changes in the price of a security, portfolio or market segment, risk refers only to the potential for an investment to lose money.

Taming Risk and Volatility

Although taking some risk is necessary to earn returns that outpace inflation, there are strategies investors can use to cushion the impact.

Dollar-cost Averaging*

Investing a fixed amount of money on a regular basis— regardless of share price—allows you to purchase securities in a variety of market conditions and may result in a lower per-share price. If you invest through a 401(k) or other qualified retirement plan, you may already be using this strategy.

Diversification**

Spreading your portfolio among a variety of asset classes and investment styles may help to mitigate risk and make your portfolio less volatile. Your financial professional can help you choose appropriate investments.

*Investing regular amounts steadily over time (dollar-cost averaging) may lower your average per-share cost, but this investment method will not guarantee a profit or protect you from a loss in declining markets. Effectiveness requires continuous investment, regardless of fluctuating prices. You should consider your ability to continue buying through periods of low prices.

**Diversification cannot eliminate the risk of investment losses. Past performance won’t guarantee future results. An investment in stocks or mutual funds can result in a loss of principal.