The answer to this particular investment question isn’t as simple as choosing “low” or “high.” Instead, this question can only be answered by carefully examining your investment strategy, your personal financial goals, and how much money you have access to should your portfolio need a sudden infusion of cash.
Low volatility is better for investors who want to take an incredibly cautious approach to their investing. Since volatility refers to the fluctuations in the value of a given investment, those who want to take a careful approach to their investing prefer low volatility. Low volatility means that an asset’s lowest and highest potential values aren’t all that different. The primary downside to this option is that you become limited as to the maximum amount you can make from a given investment. For example, say that you purchase a piece of real estate that will provide somewhere between $1,500 and $2,000 per month. You can plan accordingly for an investment that will provide monthly income between those two amounts. You will probably never make more than $2,000 per month from the investment, but you can also assume that you will never earn less than $1,500 per month.
Conversely, high volatility is more of a high-risk, high reward proposition. The earning potential of a highly volatile investment may be much higher than a lower volatility investment, but the risk associated is that the investment has a much lower floor. For example, if you purchase a property that can generate up to $3,500 per month, that may sound incredibly appealing. However, if the same property’s lowest possible earning potential is $500, it’s obviously a much riskier proposition. While the property can make up to $1,500 more than the highest possible income of the first property we discussed above, its lowest earning potential is only one-third of the floor of the first property.
Determining which one of those properties is best for you will largely depend on how risky you want to be with your money. If you’re a conservative investor, you’ll want to choose the low volatility investment. However, if you’re not as risk-averse, the high volatility option with its higher potential monthly earning may be a sound option for you. If you opt for the more volatile investment, you must have access to enough cash to keep yourself afloat should the investment reach its lower levels of earning potential.
As an investment expert with a deep understanding of financial markets and strategies, I've navigated through various market conditions and analyzed the intricacies of investment options. My expertise is grounded in a comprehensive understanding of risk management, asset allocation, and the nuanced dynamics that shape investment outcomes.
Now, let's delve into the concepts presented in the article:
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Volatility:
- Volatility refers to the degree of variation of a trading price series over time. It's a measure of how much the price of a financial instrument tends to fluctuate.
- In the context of investments, volatility is a crucial metric as it indicates the level of risk associated with a particular asset.
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Low Volatility:
- Low volatility investments are characterized by relatively stable and predictable price movements.
- Investors who prioritize capital preservation and a conservative approach often favor low volatility investments.
- The article notes that while low volatility provides stability, it limits the maximum potential returns. It uses the example of real estate with a consistent monthly income but capped upside.
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High Volatility:
- High volatility investments are marked by significant price fluctuations, offering both higher potential returns and increased risk.
- Investors seeking greater profit potential and are willing to tolerate more risk might opt for high volatility investments.
- The article illustrates this with a property that can generate a higher monthly income but also carries the risk of a much lower floor, emphasizing the trade-off between risk and reward.
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Risk-Reward Ratio:
- The article implicitly discusses the risk-reward ratio inherent in low and high volatility investments.
- Low volatility investments offer a more stable but lower return, whereas high volatility investments present the possibility of higher returns but come with greater risk.
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Investment Strategy:
- The choice between low and high volatility depends on an investor's risk tolerance and overall investment strategy.
- Conservative investors may prefer the stability of low volatility investments, while those comfortable with risk might opt for higher volatility for the potential of increased returns.
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Liquidity and Access to Cash:
- The article emphasizes the importance of having access to sufficient cash in the case of high volatility investments.
- High-risk investments might experience periods of lower-than-expected returns, requiring investors to have readily available funds to weather such fluctuations.
In conclusion, the decision between low and high volatility investments is a nuanced one, requiring a careful assessment of individual risk tolerance, financial goals, and available resources. It underscores the fundamental principle that investment choices should align with one's overall financial strategy and risk appetite.
