Volatility (finance) - Volatility For Investors

Volatility For Investors

Investors care about volatility for five reasons:-

1. The wider the swings in an investment's price, the harder emotionally it is to not worry;
2. When certain cash flows from selling a security are needed at a specific future date, higher volatility means a greater chance of a shortfall;
3. Higher volatility of returns while saving for retirement results in a wider distribution of possible final portfolio values;
4. Higher volatility of return when retired gives withdrawals a larger permanent impact on the portfolio's value;
5. Price volatility presents opportunities to buy assets cheaply and sell when overpriced.

In today's markets, it is also possible to trade volatility directly, through the use of derivative securities such as options and variance swaps. See Volatility arbitrage.