Volatility: Only a risk for the unprepared

“Risk-adjusted returns”. That’s one of the more common phrases you will see on fund manager websites. It is, after all, what we are all trying to do: maximise returns and minimise risk.

The return part of that equation is a straight forward number. But how do we measure risk? And who am I minimising risk for? They are not easy questions to answer. Certainly not as easy as the industry would have you believe.

As the sole measure of risk, share price volatility has been a bugbear of mine since I studied economics at university. It simply made no sense to me that a company whose share price was volatile was necessarily riskier than one with a stable share price.

Volatility is not a risk for everyone

One, your time horizon is crucial. If you need to sell your shares next week, then stock price variability is a significant risk for you. If you have the capacity to hold an investment for 5 or 10 years, what happens next week doesn’t matter.

Second, volatility is itself a variable. A stock that has historically shown very little volatility can become highly volatile, and vice versa. Look no further than March’s meltdown, where shares in airports went from trading like infrastructure safe havens to highly volatile tourism stocks.

Most importantly, though, for an investor with a long time horizon, volatility can be more friend than foe.

Volatility is a risk for someone who needs to sell. For someone who wants to buy, it can be an appealing feature of an investment.

Low prices equal lower risk

We want to buy shares at highly attractive prices. Almost by definition, the more a share price bounces around the more chance that, at some point in time, it trades well below its fair value.

Further, the smaller the gap between your purchase price and fair value, the higher the risk that fair value is less than your purchase price over the long term.

When used to invest at low purchase prices, higher volatility can actually reduce investment risk.

Market volatility can be stomach-churning. It’s hard to enjoy your breakfast when reading about the billions of dollars “lost” on global sharemarkets. But, if you’re a Forager client, you should welcome it. With volatility come the genuine opportunities for risk-adjusted returns.

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General advice only Forager Funds Management provides general information to help you understand our investment approach. Any financial advice we provide has not considered your personal circumstances and may not be suitable for you. Product Disclosure Statement The Trust Company (RE Services) Limited (ABN 45 003 278 831 and AFSL No. 235150) is the Responsible Entity and the issuer of the Forager Australian Shares Fund (ARSN No. 139 641 491). Fundhost Limited (ABN 69 092 517 087 and AFSL No. 233045) is the Responsible Entity and the issuer of the Forager International Shares Fund (ARSN No. 161 843 778). Before investing you should read the relevant Product Disclosure Statement and seek advice from investment and taxation professionals to determine if the product is appropriate for your needs. Performance Past performance is not a reliable indicator of future performance. The Trust Company (RE Services), Fundhost and Forager Funds Management do not guarantee investment performance or distributions, and the value of your investment may rise or fall. Total returns and estimated valuations have been calculated using the mid-point of unit prices, before taxation, after ongoing fees, and assuming reinvestment of distributions. We encourage you to think of investing as a long-term pursuit. Disclaimer To the extent permitted by law, The Trust Company (RE Services), Fundhost and Forager Funds Management, their officers, employees, consultants, advisers and authorised representatives, are not liable for any loss or damage arising as a result of any reliance placed on this document. Information has been obtained from sources believed to be reliable, but we do not represent it is accurate or complete, and it should not be relied upon as such. Forward Looking Statements Sometimes, forward-looking statements are made which reflect the expectations of Forager Funds Management about the future prospects of companies held within the portfolios of the funds. While Forager Funds Management considers its expectations to be based on reasonable grounds, there is no guarantee that those expectations will be met. Actual performance of the portfolio companies will be impacted by a variety of factors, including circumstances that cannot be foreseen, and could differ significantly from the expectations of Forager Funds Management. These statements should therefore not be relied upon as an accurate representation or prediction as to any future matters. Where portfolio companies do not perform in line with Forager Funds Management’s expectations, the funds could be adversely impacted.

Steve Johnson
Founder & Chief Investment Officer
Forager

Steve began Forager Funds in 2009, and now manages approximately $470m across two funds. Offering a listed Australian Shares Fund (FOR) and an unlisted International Shares Fund, Steve focuses on long-term investing in undervalued companies.

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