Volatility is a measure of how much a security rises or falls within a short period of time. Low volatility is best because the greater the volatility, the more difficult it is to achieve your goals.
Many investors felt the pain of extreme volatility when the technology bubble burst in 2000. For example, one technology mutual fund, the Janus Venture Fund, fell 60 percent between March 2000 and February 2001. This means that $10,000 invested on March 1, 2000, was worth just $4,000 a year later. Returning to the $10,000 original investment would require a 150-percent gain.
You can reduce the risk of big, volatile swings in the value of your investments through diversification. And because volatility seems to diminish over time, carefully consider how soon you’ll need your money when making investment choices. Here are a couple of strategies:
If you’ll need a certain amount of cash within the next five years, don’t invest it in stocks. Use money market funds, CDs, and high-quality short-term bond funds instead.
Avoid concentrated investments in any one company or market sector. This includes your employer’s stock, which should be limited to no more than 10 percent of your investments.
