Why Volatility In Your Stock Portfolio Will Help You Build Wealth
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Why Embracing Volatility in Your Stock Portfolio Can Help Build Wealth
Understanding Volatility vs. Risk
Many financial advisors often highlight a low beta as a positive attribute in your investment portfolio. Beta measures a stock's volatility compared to the market index. For instance, a stock with a beta of 1.30 is 30% more volatile than the market. Advisors frequently equate high beta with risk, suggesting that a portfolio with a beta over 1.00 is risky, while one with a beta under 1.00 is conservative. This is a misconception.
The Limitation of Beta
The beta coefficient is based on comparisons to a domestic market index, like the S&P 500 in the U.S. However, a diverse portfolio shouldn't be limited to one domestic market. You might have stocks performing well in foreign markets. So, a high beta compared to your domestic market but low compared to a regional market may not be a true indicator of risk.
Volatility Can Be Beneficial
If your portfolio has a high return, say 20% annually, its beta would be high. But that doesn't mean it's risky. In fact, in a stagnant market where the average return is 3%, a low beta might mean your portfolio is losing purchasing power due to inflation. In such cases, a higher beta, indicating higher volatility, might be desirable to achieve significant growth.
Volatility Isn't Synonymous with Risk
I prefer stocks with volatility because significant gains rarely occur without fluctuations. If you're aiming for stocks that increase by 70%, 150%, or even 1000%, you'll encounter volatility. Wealth isn't built without standout winners in your portfolio. If all substantial gains equated to reckless risk, then many successful investors have defied these odds through strategic decisions and timing.
Absolute Return Matters
Ultimately, investors care about the overall return of their portfolio. They might hold a few stocks that lose value but have enough high-performing stocks to more than offset those losses. Investment firms might label this approach as risky, but it's about the total return.
Finding Smart Volatility
Discovering volatile stocks that are potential winners takes time?"something financial consultants often lack. By doing thorough research, you can find undervalued assets and invest before the general public catches on. Some stocks yielding 150% gains could be less risky than the market when they're identified at rock-bottom prices.
Smart vs. Dumb Volatility
There's a difference between smart and dumb volatility. Chasing penny stocks purely for quick gains is unwise. Instead, seek solid companies at low prices. Smart volatility involves strategic choices, not mere chance.
Conclusion
Volatility doesn't equal risk, despite what many global investment firms propose. Low volatility and high diversification often result in mediocre returns. To build wealth, embrace volatility intelligently.
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