DEFINITION:
Volatility refers to the degree of variation in the price of an asset over time. High volatility means large swings in price, while low volatility indicates more stable prices.
WHEN AND WHY IT’S USED:
Volatility is used as an indicator of the risk level associated with an asset or portfolio. During periods of market stress or economic uncertainty, volatility tends to increase, signaling larger fluctuations in asset prices. Investors and advisors monitor volatility closely to gauge how unpredictable the market may be in the near term, which can influence investment decisions.
IMPORTANCE IN COMMUNICATION:
Communicating about volatility with your advisor is vital for understanding how market fluctuations can impact your portfolio. It allows you to appreciate the level of risk you are exposed to and to discuss strategies that may help mitigate potential losses during turbulent periods. This dialogue fosters an environment where both parties can address concerns related to market swings and plan accordingly.
In addition, discussing volatility promotes transparency regarding your risk tolerance. It enables you to ask targeted questions about how your portfolio is structured to handle rapid price changes. This ongoing conversation ensures that your investment strategy remains aligned with your comfort level and long-term financial goals, even during unpredictable market cycles.
EXAMPLES IN CONVERSATION:
“How does current market volatility affect our investment strategy?”
“What measures can we take to mitigate volatility in my portfolio?”