Lesson 4 of 5 · 5 min read
The words about risk
Volatile, correction, crash. Words that sound frightening and usually describe something normal.
Risk is not the same as danger
In everyday life, risk means something bad might happen. In investing it means something more precise: that the outcome is uncertain, in both directions. A high-risk investment can rise harder and fall harder. Without risk there's no return either, because if something were certain everyone would already have bought it and the price would already be up. So the question is never whether you take risk, but how much you can carry.
Volatile means restless
When someone says a share is volatile, they mean the price jumps around a lot. Five percent up today, four down tomorrow. That isn't automatically bad: over ten years a restless share can have done perfectly well. It's mostly unpleasant to watch, and that is exactly why it's dangerous for your decisions. Most mistakes aren't caused by a price falling, but by someone doing something while it fell.
Correction and crash
A fall of roughly ten percent is called a correction. It happens regularly, on average about once a year, and usually nothing unusual is going on. A fall of more than twenty percent that lasts longer is called a bear market. And a crash is a sudden, very sharp drop in a short time. All three have happened often in the history of markets, and after all three the market carried on.
In practice
Anyone who sold during the sharp fall in 2020 missed the recovery that followed within a few months. Anyone who did nothing barely noticed a year later.
What to do with this
You don't have to memorise any of these words to start. What you do need to know: falls are part of it, and they are normal. Only invest money you won't need in the next few years, because then you never have to sell at a bad moment. And don't look every day. That last one isn't laziness; it's the cheapest way there is to improve your result.
Stocky says
If you meet a word you don't know later in the app, tap the lamp in the top corner of the lesson. Every term from that lesson is explained there.
Remember this
- Risk means uncertainty in both directions, not just the chance of losing.
- Volatile means restless; it is mostly dangerous for your decisions.
- A correction is about ten percent and happens almost every year.
- Invest money you can go without for a few years, and you never have to sell badly timed.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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