Volatility Does Not Equal Risk

Welcome to this week's edition of The Weekly Trail Report, where we share,

1 Story, where real stories of architects and engineers meet tailored financial strategies,

1 Actionable Tip, to provide actionable insights and guide you towards financial success,

1 Financial Term, to demystify key concepts and empower your decisions.

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1. Story: Ralph Learns to See Opportunity in Volatility

Ralph, 41-year old methodical and detail-oriented engineer, prided himself on precision in his work. Every calculation mattered, every variable accounted for. So, when he decided to start investing, he brought the same mindset to his finances.

“I just want to grow my money without losing it,” Ralph told me during our first meeting. His 401(k) was parked in conservative funds, and he was sitting on a pile of cash, hesitant to make a move.

Ralph’s fear is common among risk-averse investors. He viewed the market’s ups and downs as chaotic and unpredictable—elements he worked hard to eliminate in his professional life. The thought of watching his hard-earned money dip in value, even temporarily, was enough to keep him on the sidelines.

“I’ve seen markets crash,” he said, his voice tinged with anxiety. “I just don’t know if I can handle that kind of uncertainty.”

I empathized with Ralph. Losing money, even on paper, can feel like failure. But as I explained to him, volatility isn’t the same as risk.?

Risk is the chance of permanent loss; volatility, on the other hand, is the market’s natural rhythm—its way of creating both challenges and opportunities.

“Ralph, you’re 41,” I said. “You’ve got time on your side. When the market dips, you’re not cashing out tomorrow—you’re still letting your investments grow for decades. This is exactly the time to lean into growth, not shy away from it.”

To help Ralph reframe his perspective, we reviewed historical market data. “Let’s look at this downturn here,” I said, pointing to the 2008 financial crisis on a performance chart. “Now look at what followed—those who stayed invested saw incredible growth in the years after.”

Ralph nodded but remained skeptical. “But how do I know the market will recover next time?” he asked.

“You don’t,” I said honestly. “But that’s why we don’t rely on guesswork. Instead, we focus on strategies that thrive through both ups and downs.”

We worked on a plan tailored to Ralph’s comfort level. Using strategies like dollar-cost averaging, Ralph could invest steadily over time, reducing the emotional burden of market timing. By consistently investing the same amount each month, he could buy more shares when prices are low and fewer when they are high, effectively turning volatility into an ally.

Ralph’s biggest breakthrough came when we talked about opportunity. “Think of volatility as a clearance sale,” I said. “When the market dips, you’re getting quality investments at a discount. That’s not a loss—it’s a chance to grow.”

Gradually, Ralph began shifting his perspective. He reallocated his investments to include more growth-oriented investments, understanding that being overly conservative could limit his long-term returns. He also started investing in a diversified portfolio in his brokerage account, gaining confidence as he watched his strategy play out.

Months later, Ralph called me. “I used to see every market dip as a reason to panic,” he said. “Now, I look at it as an opportunity. I’m not saying I’m fearless, but I feel like I have a plan—and that’s made all the difference.”

Ralph’s journey from fear to confidence wasn’t about erasing his risk aversion; it was about giving him the tools to navigate volatility with clarity and purpose. For Ralph, the market’s ups and downs are no longer a threat—they are part of the process of building his future.

2. Actionable Tip: Volatility ≠ Risk

One of the biggest misconceptions about investing is equating volatility with risk. While they’re often mentioned together, they’re not the same—and understanding the difference can help you make smarter, more confident investment decisions.

Volatility refers to the short-term fluctuations in the price of an investment. Markets go up, and markets go down—it’s a natural part of how they function. These fluctuations don’t necessarily mean you’re losing money; they’re just temporary changes in value.

Risk, on the other hand, is the probability of a permanent loss of capital. It’s what happens when you sell an investment at a loss, or if an asset’s value never recovers due to poor fundamentals or external factors.

Here’s a simple example to highlight the difference:

• Let’s say you invest $10,000 in a diversified portfolio. Over a year, the value fluctuates between $9,000 and $11,000 due to market volatility. However, by the end of the year, it settles back at $10,500.
• In this case, you experienced volatility—the ups and downs—but there was no risk of permanent loss as long as you stayed invested. In fact, you gained $500 by the end of the year.

Now, imagine investing $10,000 in a single company that eventually goes bankrupt. That’s risk—a permanent loss of capital.

The Key Takeaway:

Volatility is temporary, but risk can be permanent. By staying invested through volatile periods and focusing on diversification, you can weather short-term fluctuations while positioning yourself for long-term gains.

Rather than fearing volatility, use it as an opportunity.

For example:

• Volatility allows you to buy quality investments at lower prices.
• Over time, it smooths out as your investments grow, especially if you have a long time horizon.

Understanding the distinction between volatility and risk can help you embrace the market’s natural movements and avoid making emotionally driven decisions that could lead to real losses. With the right mindset and strategy, volatility becomes a tool—not a threat.

3. Financial Term: Drawdown

A drawdown refers to the decline in value from a portfolio’s peak to its lowest point before it recovers. It’s a way to measure the depth of a temporary loss during periods of market volatility.

For example, if your portfolio peaks at $100,000 and then drops to $80,000, you’ve experienced a 20% drawdown. If your portfolio eventually recovers and surpasses $100,000, that drawdown is officially in the past—it’s not a permanent loss unless you sell your investments during the decline.

Why Does Drawdown Matter?

• Perspective During Volatility: It helps investors understand and contextualize temporary losses. Knowing that drawdowns are a normal part of market behavior can reduce emotional reactions during downturns.
• Recovery Potential: Most portfolios experience drawdowns, but the critical factor is what happens next. A well-constructed, diversified portfolio has the ability to recover and grow over time.

One of the biggest risks during a drawdown is making impulsive decisions. Selling during a downturn locks in losses and eliminates the chance for recovery. On the other hand, staying invested allows your portfolio to rebound as markets recover.

Drawdowns are temporary, but they can feel permanent if you let fear take over. By focusing on long-term goals and maintaining a diversified strategy, you can weather drawdowns with confidence, knowing that market recoveries historically outweigh declines over time. Embrace them as part of the investment journey—they’re bumps in the road, not dead ends.

Happy Trails,

Ryan

Disclaimer: We employ fictional characters to illustrate financial concepts faced by individuals in the architecture and engineering industry. Any resemblance to real persons, living or dead, is coincidental. While the stories are inspired by our experiences, the specific details, circumstances, and outcomes mentioned are entirely fictional and created for educational purposes only. Real client information is strictly confidential and never disclosed without explicit consent. Our aim is to provide relatable examples for educational purposes, respecting the privacy and confidentiality of our clients. This information is presented for educational purposes only and is not to be considered financial, tax, legal, or investment advice.