Coming to terms with volatility

investor newspaper

Anyone hoping to create and grow their wealth is going to have to think about investing. And while there's plenty to consider when it comes to maximising your assets, one of the concepts you'll have to immediately come to terms with is volatility.

While in an ideal world, the value of an investment asset would simply go up and up forever, things are a little more complicated in the real world. Have you ever looked at a graph showing an asset's value growth? Though the line may be moving steadily upwards, if you look closely, it's a jagged line, zig-zagging up and down as it climbs higher.

Explaining volatility

Simply put, this is volatility. It's normal for investments to fluctuate in value a little bit over time, although some asset classes have higher volatility than others - shares for instance, or some types of super funds. By contrast, investments like property or, especially, fixed interest tend to be less volatile.

Small ups and downs in an asset's value are generally not something to get concerned over. The same goes for if an investment fund that's tailored toward growth posts a loss one year. With these types of investments, a single isolated loss is not necessarily the end of the world, particularly because the investment is likely to make up for it down the line.

It's large fluctuations and frequent, recurring, long-term losses that budding wealth builders should really be concerned about. These may be warning signs that your investment strategy needs some tweaking.

What to keep in mind

As suggested above, inexperienced investors can get skittish when they see one or more of their investments has experienced some volatility. The key thing is to keep your emotions in check - recognise that volatility is a natural part of investing, and that it may not necessarily mean the sky is falling.

At the same time, it's important to look at ways to manage volatility and, therefore, risk. Diversify your asset allocation, for example, so that you don't have all your eggs in one basket, and consider switching up your strategy as your personal circumstances change.