While often used interchangeably, market volatility and risk are distinct concepts in investing. Volatility refers to the short-term fluctuations in an asset’s price, which can be both upward and downward. Risk, however, is the potential for a permanent loss of capital. Understanding this difference is crucial for long-term investors, as it can help you avoid making reactionary decisions and remain focused on your financial goals, even during periods of market turbulence.
Volatility vs Risk in Investing
The famous daredevil Evil Knievel once said: “Risk is good. Not properly managing your risk is a dangerous leap.”
While he was talking about jumping a motorbike over a line of school buses, the sentiment still holds true when thinking about investments. Without exposing your wealth to some level of risk, you may not be able to achieve as much growth as you otherwise could. But, adopting too much risk or the wrong type of risk could mean there is a greater chance to lose money, ultimately making it harder to reach your long-term goals.
That’s why finding the right balance and knowing how to correctly assess the level of risk in a given investment is crucial. Unfortunately, many investors find this difficult because they don’t know the difference between market volatility and risk. Often, people use these two terms interchangeably. But there is actually an important distinction between them, and understanding this could help you make more measured decisions about your wealth.
Read on to learn about the difference between volatility and risk, and why it’s so important.
Volatility: The Ups and Downs of Your Investments
The term “volatility” describes fluctuations in the value of an asset, index, portfolio or any other kind of investment. The word can apply to an upwards movement, as well as a drop in value, and it is not necessarily a bad thing. For example, during a period of volatility when prices are fluctuating, you could see the value of certain investments increase.
Despite this, investors tend to perceive volatility as a negative factor in terms of investing and assume that it is always a cause for concern. Indeed, you may have been nervous about the volatility of the last few years. Global events such as the Covid-19 pandemic and the war in Ukraine caused uncertainty and the value of your investments may have dropped as a result.
You might have assumed this was a threat to your financial plan but that is not necessarily the case, and it is important to always consider these movements in a wider context. The market downturn was similar to previous market fluctuations, such as the 2008 financial crisis, the dot-com bubble, or even the Wall Street Crash, for example. Global markets regularly experience these big upsets. In many cases, they bounce back and investors still achieve long-term growth.
When Covid-19 swept across the world, for instance, the Dow Jones and S&P 500 experienced their biggest weekly declines since the 2008 financial crisis in late February 2020. Even so, the markets had returned to their pre-pandemic levels by May 2020. Consequently, volatility does not necessarily equate to risk because investors may still see long-term growth and reach their financial goals if they simply wait until markets bounce back.
Risk: The Danger of a Permanent Loss
If volatility is like turbulence on an aeroplane, then risk is a crash landing, the permanent loss of your capital. While volatility is the short-term noise, risk is the long-term, irreversible outcome that prevents you from reaching your financial goals.
Consider this: an investment in a stable, established company might experience high volatility during a market downturn, but it is unlikely to go to zero. The price will eventually recover. However, an investment in a new, unproven company, or one with a fundamentally flawed business model, carries the risk of complete failure, regardless of short-term volatility. A classic example is a company like Enron, whose stock price was highly volatile before its collapse, at which point the risk of permanent capital loss became a reality for investors.
Whenever there is a period of short-term market volatility, many investors panic because they feel that the risk has increased too. They may think that, if prices are dropping, holding those investments is riskier than it was in the past, when prices were rising. Yet crucially, market volatility only equates to increased risk if it makes it harder to reach your financial goals.
If you have no plans to sell investments now or in the near future, short-term volatility does not necessarily create risk. You may plan to hold those investments for another 20 years, for example, so the critical question is whether the value is likely to increase in that time frame or not, regardless of short-term movements. Indeed, historical stock market data shows that it often will. For example, according to figures from the London Stock Exchange, the value of the FTSE 100 almost doubled between 6 April 2003 and 6 April 2023.
Making Your Investment Plan with a Volatility in Mind
This is despite several considerable market upsets in that 20-year period, including the 2008 financial crisis. Historical data from the London Stock Exchange shows that the FTSE 100 dropped 34.86% in February 2009. However, by February 2011, markets had recovered, and the value of the FTSE 100 was rising again. So, for example, if had you planned to sell your investments sometime between 2008 and 2010 and use the funds to purchase a holiday home, this short-term drop in value may have affected your goals.
However, if you held your investments for the full 20-year period and then sold them to fund your retirement, the level of risk is different. That volatility, in all likelihood, wouldn’t have created much risk because, by the time you came to sell your investments, the markets would have recovered and you would still have been able to fund your desired retirement.
In this instance, volatility may have even been a good thing because it would allow you to invest more at a lower price when values dropped. This is a key principle of a long-term investment strategy. This demonstrates that two investors can have a completely different level of risk depending on what their goals are, even though they are both affected by the same period of market volatility. Bear in mind that past performance is not a reliable indicator of future performance.
Understanding this important distinction between volatility and risk can help you remain calm and think clearly in the face of market noise. It’s easy to let warnings about market fluctuations worry you, especially when you see the value of your investments dropping. So, before making any decisions, it can be useful to revisit your goals. Consider whether this period of volatility will genuinely affect your ability to reach your financial goals. In many cases, particularly if you are planning for the long-term, you may find that it doesn’t, and you don’t need to make any changes to your strategy.
Working with a financial planner to set clear goals and assess how different factors may affect them can be useful here, especially if you are prone to making reactionary decisions in uncertain times. Learn more about how we can help you build a resilient financial plan that aligns with your long-term objectives.
Keeping your financial goals at the centre can help you navigate market volatility
Understanding this important distinction between volatility and risk can help you remain calm and think clearly in the face of market noise.
It’s easy to let warnings about market fluctuations worry you, especially when you see the value of your investments dropping. So, before making any decisions, it can be useful to revisit your goals.
Consider whether this period of volatility will genuinely affect your ability to reach your financial goals. In many cases, particularly if you are planning for the long-term, you may find that it doesn’t, and you don’t need to make any changes to your strategy.
Working with a financial planner to set clear goals and assess how different factors may affect them can be useful here, especially if you are prone to making reactionary decisions in uncertain times.
Get in touch
If you need help deciding what level of risk is suitable for you to reach your financial goals, we are here to help.
Email hello@fcadvice.co.uk or call 0330 828 4714 for more guidance.
Author Bio
This article was crafted by the team at Flying Colours, a firm of independent financial advisers dedicated to providing personalised, clear, and actionable financial guidance. With a collective of highly qualified professionals, including Chartered Financial Planners and specialist advisers, the team brings a wealth of expertise in areas ranging from retirement and investment planning to tax and estate management. Flying Colours’ commitment is to build long-term relationships with clients, helping them navigate complex financial landscapes and achieve their life goals with confidence and clarity.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
Created: 31 October 2023
Updated: 17th September 2025