Do you truly understand the difference between volatility and risk? Modern portfolio theory was trademarked in the 1950s and is often still used today in our industry. This approach is still viable today and highlights understanding portfolio risk and the proper way to measure volatility. Standard deviation is a mathematical formula we use to measure and estimate risk. While it doesn’t address all major risks, it’s an essential part of protecting your portfolio and following the Redefining Wealth® process.
The risk in your portfolio can come from various areas: business, purchasing power, high interest rates, etc. All of these threats are working against your retirement plan and that’s why we use standard deviation. Our goal is to build a portfolio that takes on the least amount of risk possible and still garners high returns. On today’s episode we’ll break down how we measure risk, beta exposure, and much more.
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Timestamps (show notes):
1:23 – The difference between volatility and risk
4:30 – Why is standard deviation important?
7:23 – What is high beta exposure?
11:59 – Issues with standard deviation
14:30 – Two groups of investors
19:07 – The best definition of volatility and risk
23:02 – Less risk for more return