Volatility: advantage or danger? Find out how to control this crucial factor in your investments!

Volatility is often used to measure the risk of an investment. The standard deviation of prices is used to measure it. To be more precise, we should rather talk about the coefficient of variation, which measures the ratio of the standard deviation to the mean. Indeed, to be able to compare the volatility of stocks whose prices differ significantly, we must divide the standard deviation by the mean price. Volatility is not a risk in itself, it is mainly a risk in relation to the investor's temperament.

A stock that fluctuates sharply up and down is not necessarily riskier, but it can be depending on the feelings of fear and greed of the investor, leading him to make bad decisions. Conversely, those with strong nerves will be able to invest in "nervous" stocks (e.g. in emerging markets) and benefit from potentially higher performance. For them, volatility is an opportunity.

Unfortunately, or fortunately, we are still human and even the strongest of us feel emotions. Feelings of fear and greed can thus lead the investor to make wrong decisions.

In addition to the irrational behavior of the investor, entry and exit points are more likely to be good or bad with a volatile stock. A contrarian investor, like Warren Buffett, knows how to take advantage of these movements to generate nice capital gains, ignoring the feelings of the masses. Conversely, many small investors (and sometimes even larger ones) systematically make mistakes by buying at the worst possible time. Less volatile stocks thus reduce the risk of making a mistake.

It is commonly accepted that the The potential profitability of a security is correlated with its volatility.. It's a bit like a trampoline, to go high you have to make bigger and bigger jumps, but each descent is also bigger. In theory, to become rich, we should invest in very volatile stocks, sleep on them for a few years, and then collect the jackpot. The problem again is that we are not purely rational beings, we are bombarded with information all day long, we can't help but go and see the value of our positions, freak out and finally sell them, regretting it later. Raise your hand if you have never done that.

Not only does the investor act irrationally, but volatility is also not always correlated with performance. This is particularly the case for companies in difficulty. Also, rather than using the trampoline, we could also climb up using a staircase. It is a little longer, less fun, but safer. Quality securities paying growing dividends are mostly low volatility and show good long-term performance.

Since time is of the essence with growing dividends, it is therefore essential to take volatility into account. An ill-timed sale due to irrational investor behavior would wipe out all the benefits of compound interest. It is therefore better to keep less spectacular titles in your portfolio., but no longer certain of arriving safely with their purchaser.

So, volatility, friend or foe? It all depends on the investor, actually. For those who know their own limits and can tame it, it is certainly a powerful ally. On the contrary, for those who do not take it into account or who are unaware of the impact it will have on them, it can be the worst nightmare.