Two General Risks
All investors face two general types of risk.
First, there's the risk of losing money over the short term. Over the last 85 years, the stock market has returned around 10% per year, on average. However, looking at individual years over that time period, about one out of every four was a down year in the market.
And over shorter time periods--a few weeks or months--investments can be even more volatile.
Investors focus almost exclusively on this type of risk. It's easy to do. Every day you hear about how the market is doing on the radio, television and online. And if that's not enough, you can check real-time stock prices throughout the day right from the phone in your hand.
But you shouldn't let volatility get the best of you. If you do, you'll virtually ignore the second and perhaps even greater risk that comes with investing: the risk that you won't meet your investing goals.
Obsessing about volatility may cause you to invest too emotionally without considering all the facts. Volatility may also lead you to buy or sell an investment based on short-term performance rather than on how the purchase or sale will help you reach your goal. In short, volatility can prevent you from seeing the forest for the trees.
The takeaway: You need to weigh how important it is for you to reach your goal against how much short-term volatility you're willing to accept.
Read Next: Contributors to Volatility