In an effort to try to understand risk as it pertains to the market, I read essays that my grandpa had written, I read essays that my dad had written, I had an hour-long discussion with my grandpa on the subject, and I learned some things while studying for the SIE exam. Here’s my resulting opinion–Part 2.

I have two more topics I want to discuss before we wrap up that I think are key distinctions to make.

• Volatility vs Risk and
• Money vs Purchasing Power

Remember, our definition of risk is the opportunity for an investment to return an unfavorable outcome. Volatility is the degree and frequency with which a price moves up and down within a given time period. Volatility is a risk it’s just not the only risk, so I would suggest not using them as synonyms.

Simply put, purchasing power is what you are able to get with your dollar and money is the dollar itself. When I was 15, I could buy a new halter for my horse for roughly $10-$15, today the price is about $35 and up. That’s purchasing power. I still have $15, but it’s not getting my horse a new halter. When looking at investment risk, are you concerned about losing your dollar or the ability to buy something with it?

I hope I’ve provided a workable, easy to apply definition of risk as well as some ideas for how to manage it. Please remember that I am not an investment advisor nor am I a portfolio manager, but I can introduce you to a few. This has been my opinion on risk.