Financial academics define risk as volatility. But while a stock or a mutual fund that bounces around in price may give investors heartburn, most normal people really don’t think of fluctuating prices as risk – especially when prices dance around but mainly rise. For them, real risk is the chance that their portfolio will go down in value and they’ll lose money.
To me, that’s a common sense view of risk, so I’m glad that Haywood Kelly, the head of global research at Morningstar, shares my thinking.
More to Risk Than Volatility
Writing in the recent edition of his company’s magazine for financial professionals, Kelly says that he followed the orthodox line about risk equaling volatility when he started as an analyst many years ago. His first job was following Japanese stocks during what we later realized was a bubble in that market. At the time, of course, not many people considered the Japanese equity market risky because it had great historical returns and very low volatility.