In investing, volatility is when your portfolio increases or decreases in price substantially. In the stock market, a price move of +/-3% typically means there is volatility, while in the crypto market, a price move of +/-10% typically means high volatility. Since its inception, cryptocurrency has always been significantly more volatile than the stock market.
When you can manage volatility, you gain consistency in your wealth growth. Here are five reasons managing volatility makes you more wealthy.
1. The Obvious: your portfolio losing money is bad
A portfolio that loses 3% daily is bad. That's quite obvious. Basic math tells us that if you lose 50% of your portfolio, you have to make a 100% return just to get back to even. Typically, it may takes months to accumulate gains, but only days to lose them. Most major down turns happen only a few trading days a year. Hence, minimizing losses is critical as it typically takes more time to make money in the market than lose it.
2. High Volatility Upwards is also bad
Whoa, your portfolio is up 20% today! That quarterly earnings report was amazing and buying is going nuts. So what do you do? You unfortunately buy more thinking momentum is going to hold. The problem with high upwards price movement is that you may now be buying more stock of a company you own at a premium. If you're running a cost-averaging strategy, this is especially bad because now you're consistently buying at premium. A lot of times, these price movements correct just a few days later, and now you're stuck with overpriced shares of your company.
3. Using Margin
Yeah, no one ever tells retail investors to use margin. But I'm going there I don't care. Margin is a loan to buy investments. The typical chorus is: don't use margin if you're a retail investor, it's too risky and you may get a margin call...
But here's the thing. If you manage volatilty, I believe you should use margin. Now I'm not talking about a huge loan. I'm talking no more than 5% of your portfolio. But exponential growth of 5% is a lot. But you can only have access to this extra earnings potential if you have a risk-managed portfolio. Though nothing is ever certain in the market, what typically happens when using a modest amount of margin responsibly is that most of the time, that's extra money being used to make you more money. With proper management, the amount of money you make with margin during up times will offset the losses during uncertain times. But all of this extra opportunity can only be tapped into if you manage the volatility of your portfolio.
4. Take on Bigger Opportunities
Tesla, Apple, Google, Roblox... all these tech companies are very volatile stocks. However, the opportunity for major growth is huge. If you go "all-in" on these opportunities, there is a real chance you could seriously lose half your investment. And as we said early, it will take a lot of time to recuperate your losses. But, if you mix your portfolio with less volatile assets, you can minimize your down-side loss while still being exposed to major opportunities like tech stocks. In the long term, you could make more money on tech stocks, but having less risky stocks in your portfolio help you wait out the volatility periods of these tech stocks.
5. The More Emotion You Remove, the Better Your Performance
Volatility causes a lot of emotions in people. This is completely understandable. Who wants to arbitrarily lose money? No trader or investor removes their emotions from the market. They feel dismayed when they lose their money. But good investors don't let those emotions keep them from making money. By managing volatility, good investors can rest assure that they will still make money even when the whole market is in turmoil and keep their emotions to a minimum.
Volatility Management is a cornerstone of investing. It is the practical way of transforming the stock market from a slot machine to a money machine. In an upcoming article, I'll discuss strategies you can use to manage your portfolio volatility. I'll also discuss some of the powerful tools you have in StockBossUp to measure and control your portfolio's volatility.